What is 'Stress Testing' in the context of risk management in Banks? Discuss the various approaches of stress testing.

Stress testing in the context of risk management in banks is a critical analytical process used to evaluate how financial institutions can withstand extreme but plausible adverse conditions. It serves as a forward-looking risk assessment tool that complements traditional risk management practices by providing insights into the vulnerabilities of a bank’s portfolio under stressed scenarios. These scenarios may include macroeconomic downturns, market shocks, liquidity shortages, or systemic financial crises. Strategic management within banks integrates stress testing to anticipate risk exposures, ensure regulatory compliance, and align risk appetite with the institution's long-term objectives.

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