## Macroprudential Stress Testing & Macroprudential Policy: Some Observations

## Source details

**Canonical URL:** [Macroprudential Stress Testing & Macroprudential Policy: Some Observations](https://www.imf.org/-/media/files/news/seminars/mcm-lse-mohanty_session5.pdf)

## Other formats

- [Markdown version](/-/media/files/news/seminars/mcm-lse-mohanty_session5.pdf.md)
- [Structured JSON version](/-/media/files/news/seminars/mcm-lse-mohanty_session5.pdf.json)

---

### Macroprudential Policy
- Primary prudential tools to limit systemic risks
- Building & realising buffers
- Procyclical feedback between asset prices and credit
- Arrest structural vulnerability arising out of interlinkages & common exposures

### Macroprudential Policy: Challenges
- Measuring systemic risk remains inherently difficult
- Uncertain transmission process
- Prone to boundary problem and cross-border arbitrage
- Optimality of regulatory discretion vis-à -vis quantitative calibration

### Macroprudential Policy: Modelling Challenges
- How to generate crisis-consistent estimates?
- How to capture non-linear impact?
- How to guard against model risk?
- How to factor in structural changes?

### Stress Test Framework: India
- Tests for both time and cross-section dimensions
- Macro-stress test to assess vulnerability against macroeconomic shocks
- Tests contagion risk through network analysis: goes beyond banking system
- Time dimension captured through single factor sensitivity analysis: e.g. credit, interest rate & liquidity

### Translating Analysis into Policy
- Limitation of data: backward looking balance sheet data; how to filter out noise; how far is market forward looking?
- Information privacy issues; skills for data collection and compilation
- Acceptable model for quantification of risks on a consolidated basis.
- How to achieve a strong governance structure when success is not easily measurable
- Macroprudential policy authority: interaction with monetary policy
- Accountability framework while providing for country specificity

---


_Source: https://www.imf.org/-/media/files/news/seminars/mcm-lse-mohanty_session5.pdf_