Designing Effective Macroprudential Stress Tests: Progress So Far and the Way Forward

June 30, 2015

Preview Citation

Format: Chicago

Dimitri G Demekas. Designing Effective Macroprudential Stress Tests: Progress So Far and the Way Forward, (USA: International Monetary Fund, 2015) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Giving stress tests a macroprudential perspective requires (i) incorporating general equilibrium dimensions, so that the outcome of the test depends not only on the size of the shock and the buffers of individual institutions but also on their behavioral responses and their interactions with each other and with other economic agents; and (ii) focusing on the resilience of the system as a whole. Progress has been made toward the first goal: several models are now available that attempt to integrate solvency, liquidity, and other sources of risk and to capture some behavioral responses and feedback effects. But building models that measure correctly systemic risk and the contribution of individual institutions to it while, at the same time, relating the results to the established regulatory framework has proved more difficult. Looking forward, making macroprudential stress tests more effective would entail using a variety of analytical approaches and scenarios, integrating non-bank financial entities, and exploring the use of agent-based models. As well, macroprudential stress tests should not be used in isolation but be treated as complements to other tools and—crucially—be combined with microprudential perspectives.

Subject: Banking, Financial sector policy and analysis, Financial sector stability, Financial statements, Macroprudential stress testing, Public financial management (PFM), Stress testing, Systemic risk

Keywords: Bank assets, Bank capital requirement, Bank default risk indicator, Bank liability structure, Bank management action, Bank regulator, Banks, Capital position, Central bank, Contagion, Distress dependence, Financial sector stability, Financial stability, Financial statements, Global, Liquidity, Macroprudential stress testing, Shortfalls vis-à-vis, Solvency, Stress testing, Stress tests, Systemic risk, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/146
Stock No:

WPIEA2015146
ISBN:

9781513513621
ISSN:

1018-5941

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