How do bank ’stress tests’ work?

WASHINGTON – After weeks of speculation, regulators led by the Federal Reserve are telling banks how they fared in the “stress tests” at the center of the Obama administration’s financial rescue plan. Markets rallied and investors breathed a little easier Friday after a Fed news release on the methods underlying the stress tests. But the white paper, which one former bank examiner for the Fed called “not for mass consumption,” left lay people wondering what it all means. Here are a few questions and answers about the stress test’s methods and the next steps for shoring up the financial system. Question: What is this “stress test”? Answer: The “stress test” is actually two tests measuring how…

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