Towards Macroprudential Stress Testing: Incorporating Macro-Feedback Effects

June 30, 2017

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Ivo Krznar, and Troy D Matheson. Towards Macroprudential Stress Testing: Incorporating Macro-Feedback Effects, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Macro-feedback effects have been identified as a key missing element for more effective macro-prudential stress testing. To fill this gap, this paper develops a framework that facilitates the analysis of both the direct effects of macroeconomic shocks on the solvency of individual banks and feedback effects that allow for the amplification and propagation of shocks that can result from bank deleveraging and credit crunches. The framework ensures consistency in the key relationships between macroeconomic and financial variables, and banks’ balance sheets. This is accomplished by embedding a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomic model. The framework has numerous applications that can strengthen stress testing and macro financial analysis. Moreover, it provides an avenue for many extensions that address the challenges of incorporating other second-round effects important for comprehensive systemic risk analysis, such as interactions between solvency, liquidity and contagion risks. To this end, the paper presents some preliminary simulations of feedback effects arising from the link between the liquidity and solvency risk.

Subject: Banking, Capital adequacy requirements, Countercyclical capital buffers, Credit, Financial regulation and supervision, Financial sector policy and analysis, Income, Money, National accounts, Personal income, Stress testing

Keywords: A. macro module, Balance sheet dynamics, Bank, Banking sector, Capital adequacy requirements, Capital requirement shock, Countercyclical capital buffers, Credit, Credit crunch, Credit gap, Credit impulse response, Credit shock, Credit supply, Global, Impulse response, Income, Income statement, Income statement item, Loss absorbency level, Macro feedback effect, Macro feedback effects, Panel credit equation, Personal income, Portfolio adjustment, Projections of capital ratio, Solvency position, Solvency problem, Solvency risk, Stress testing, WP

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/149
Stock No:

WPIEA2017149
ISBN:

9781484303634
ISSN:

1018-5941

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