The Real Effects of Financial Sector Risk

By Andrea M. Maechler, Alexander F. Tieman

September 1, 2009

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Andrea M. Maechler, and Alexander F. Tieman The Real Effects of Financial Sector Risk, (USA: International Monetary Fund, 2009) 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

This paper estimates the magnitude of key effects on the real economy from financial sector stress. We focus on the short-run feedback effect from market-based indicators of financial sector risk to the real economy through the credit channel, and estimate this effect on an economy-wide (macro) level, as well as on the level of individual large banks. Both estimates yield significant feedback effects of substantial magnitude. The estimates are consistent with other work in this area. Our results suggest that prudential supervision could be enhanced by taking into account the feedback effects of financial instability in the real economy. We also propose a way to integrate feedback effects into stress tests in order to improve realism and accuracy or macroeconomic stress scenarios, as well as a metric to interpret stress testing results.

Subject: Bank credit, Banking, Credit, Financial sector, Financial sector risk

Keywords: Bank, Credit growth, GDP, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/198
Stock No:

WPIEA2009198
ISBN:

9781451873450
ISSN:

1018-5941

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