What are stress-testing scenarios used for?

Stress-testing scenarios are primarily used to assess resilience under extreme conditions. In the context of financial risk management, stress testing is a critical tool that institutions use to evaluate how they will perform in adverse circumstances. This includes simulating severe economic downturns, market crashes, or other catastrophic events that could impact financial stability.

By applying these extreme scenarios, risk managers can understand potential vulnerabilities within their portfolios, operational strategies, and capital adequacy. The goal is to ensure that the institution has sufficient risk mitigation strategies in place and can maintain operational resilience, even during times of significant financial strain.

The other choices do not align with the primary purpose of stress-testing scenarios. Predicting stock market trends relates more to forecasting and technical analysis rather than stress testing. Analyzing employee performance is a function assigned to human resources and performance management, while documenting procedural risks concerns compliance and governance rather than the assessment of resilience through hypothetical adverse scenarios.