IMF Working Papers

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

Author/Editor:

Dimitri G Demekas

Publication Date:

June 30, 2015

Electronic Access:

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

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.

Series:

Working Paper No. 2015/146

Subject:

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