IMF Working Papers

Macro-Prudential Stress Test Models: A Survey

Author/Editor:

David Aikman ; Daniel Beale ; Adam Brinley-Codd ; Anne-Caroline Hüser ; Giovanni Covi ; Caterina Lepore

Publication Date:

August 25, 2023

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

In this paper, we survey the rapidly developing literature on macroprudential stress-testing models. The scope of the survey includes models of contagion between banks, models of contagion within the wider financial system including non-bank financial institutions such as investment funds, and models that emphasise the two-way interaction between the financial sector and the real economy. Our aim is two-fold: first, to provide a reference guide of the state-of-the-art for those developing such models; second, to distil insights from this endeavour for policy-makers using these models. In our view, the modelling frontier faces three main challenges: (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress, (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress and (c) stress testing models that incorporate comprehensive two-way interactions between the financial system and the real economy. Emerging lessons for policy-makers are that, for a given-sized shock hitting the system, its eventual impact will depend on (a) the size of financial institutions' capital and liquidity buffers, (b) the liquidation strategies financial institutions adopt when they need to raise cash, and (c) the topology of the financial network.

Series:

Working Paper No. 2023/173

Subject:

Asset and liability management Asset liquidity Commercial banks Financial institutions Financial sector policy and analysis Liquidity Solvency Stress testing

Frequency:

regular