## Symposium: Macroprudential Stress Test and Policies: A Framework — Report from the MCM-LSE Working Group (Jon Danielsson and Miguel Segoviano, December 15-16, 2016, International Monetary Fund)

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**Canonical URL:** [Symposium: Macroprudential Stress Test and Policies: A Framework — Report from the MCM-LSE Working Group (Jon Danielsson and Miguel Segoviano, December 15-16, 2016, International Monetary Fund)](https://www.imf.org/-/media/files/news/seminars/mcm-lse-segoviano_danielsson_session1.pdf)

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### Aim and purpose
- The Symposium (December 15-16, 2016) aimed to:
  - present state-of-the-art MaPST methodologies discussing modelling and implementation challenges;
  - provide a roadmap for future research and practical implementations in stress testing; and
  - guide authorities on the use of MaPST to support macroprudential tool calibration.

### External collaborators and contributors
- Official sector contributors included:
  - Bank of Japan — Hitoshi Mio
  - Bank of Mexico — Alan Elizondo
  - Hong Kong Monetary Authority — Cho Hoi Hui
  - Bank of Canada — Ian Christensen
  - Bank of England — Alexander Brazier
  - European Central Bank — Jerome Henry
  - Office of Financial Research — Mark Flood
  - Reserve Bank of India — Deepak Mohanty
- Academic contributors included:
  - Charles Goodhart
  - Rama Cont
  - Itay Goldstein
  - Casper de Vries
- IMF and LSE collaborators listed:
  - IMF: Chikako Baba, Udabir Das, Heedon Kang, Miguel Segoviano
  - LSE Systemic Risk Centre: Ron Anderson, Jon Danielsson, Malcolm Knight

### Stress testing: conceptual framing
- Most stress testing is microprudential, focusing on individual institutions and their resiliency to exogenous shocks.
- This microprudential focus is not informative about systemic risk.
- There is a need to:
  - model the interaction between the variety of financial institutions; and
  - model amplification mechanisms.

### Interactions across financial sectors
- A variety of financial institutions interact, including:
  - Banks GSIBs all the way to the smallest bank
  - Parallel banks
  - Insurance companies
  - Asset managers (mutual funds, hedge funds)
  - Pension funds
  - Sovereign wealth funds
- Each institution type has its own cyclicality.
- Cycles may coincide or cancel each other out.
- Need for a dynamic endogenous network structure.

### Nature of risk and crises
- Most existing microprudential stress tests treat risk as exogenous—arriving from outside the financial system and influencing banks but not influenced by banks.
- Almost all stress events and crises are caused by endogenous risk—the interaction of all market participants in equilibrium.
- Participants have differing information sets, objectives, abilities, prejudices.
- Crises can be conceptualized as occurring when a latent process hits a latent trigger: before, nonvisible; after, ex post recognition of missed signals.

### Amplification mechanisms
- Because risk is endogenous, amplification mechanisms must be considered.
- There is an infinite number of triggers and a very small number of amplification mechanisms.
- The same shock could trigger a crisis today and whimper out into nothing tomorrow depending on amplification pathways.

### Key pillars and conceptual/empirical frameworks
- The Symposium focused on:
  - Conceptual and empirical frameworks
  - Implementing MaPST
  - Linking MaPST to policy
  - Institutional frameworks
  - Broader macroprudential policy
- Stress testing frameworks should ideally account for multiple layers of amplification mechanisms, including:
  - Macrofinancial feedback and second-round effects
  - Leverage
  - Liquidity
  - Direct contagion
  - Indirect contagion
- Examples of channels include:
  - Other bank non-bank assets/liabilities
  - Other assets including securities, derivatives, foreign exchange
  - Interbank loans (unsecured)
  - Fire sales/information asymmetry across various asset classes and interbank loans

### Implementing Macroprudential Stress Testing (MaPST)
- Examples of frameworks are being developed by policymakers and are being incorporated to varying degrees.
- The Symposium addressed challenges regarding measurement, data, and timeliness.
- Paths to overcoming these challenges and examples of research agendas were discussed.

### Linking MaPST to macroprudential policy
- Macroprudential stress tests can be useful to the calibration of macroprudential tools.
- The Symposium explored:
  - Specific examples of how instruments could be calibrated with MaPST
  - Challenges policymakers face in calibrating macroprudential policy instruments
  - What information from macroprudential stress tests might be useful for calibration

### Institutional frameworks, governance, and communication
- Relevant institutional questions discussed included:
  - How do we best communicate stress test results?
  - How can we best ensure proper accountability and governance structures surrounding macroprudential policy?
  - How do we assess the cost and benefits of macroprudential policy?
  - What are the essential frameworks required to counter inaction biases and increase accountability?

### Fitting MaPST into the broader policy framework
- Considerations included:
  - Interactions between Macroprudential Stress Tests and Microprudential Stress Tests
  - How to avoid inconsistencies and ensure coordination of macro- and microprudential policy tools
  - Whether there are interactions of macroprudential policy that should be assessed via MaPST

### Going forward: future work agenda
- Key issues for the future identified at the Symposium:
  - Data Collection
  - Development of Models
  - Implementation of Macroprudential Policy, Role of the IMF, etc.

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_Source: https://www.imf.org/-/media/files/news/seminars/mcm-lse-segoviano_danielsson_session1.pdf_