Designing Effective Macroprudential Stress Tests: Progress So Far and the Way Forward
IMF Working Papers, June 30, 2015
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Bibliographic details
- Authors: Dimitri G Demekas
- Published: June 30, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513513621.001
Overview
- Giving stress tests a macroprudential perspective requires:
- incorporating general equilibrium dimensions, so that the outcome 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
- focusing on the resilience of the system as a whole.
- Progress has been made toward integrating solvency, liquidity, and other sources of risk and capturing some behavioral responses and feedback effects, but challenges remain in measuring systemic risk and linking results to the established regulatory framework.
Progress and Challenges
- Progress:
- Several models are now available that attempt to integrate solvency, liquidity, and other sources of risk and capture some behavioral responses and feedback effects.
- Challenges:
- Building models that correctly measure systemic risk and the contribution of individual institutions while relating results to the established regulatory framework has proved difficult.
- Incorporating non-bank financial entities and broader financial sector interactions remains an important gap.
- Capturing full behavioral responses and general equilibrium effects across agents and markets is still work in progress.
Policy Recommendations and Way Forward
- Analytical approaches and scenarios:
- Use a variety of analytical approaches and scenarios rather than relying on a single model or scenario.
- Scope and integration:
- Integrate non-bank financial entities into macroprudential stress-testing frameworks.
- Methodological innovation:
- Explore the use of agent-based models to capture heterogeneous agent behavior and complex interactions.
- Policy coordination:
- Treat macroprudential stress tests as complements to other tools and combine them with microprudential perspectives; do not use them in isolation.
Key Findings and Emphases
- Stress tests with a macroprudential perspective must account for:
- behavioral responses of institutions and other economic agents;
- interactions among institutions and across markets;
- systemic resilience rather than only individual institution solvency.
- Macroprudential stress tests are part of a broader toolkit and should be linked with microprudential regulation and other policy tools.
Dimitri G Demekas. "Designing Effective Macroprudential Stress Tests: Progress So Far and the Way Forward", IMF Working Papers 2015, 146 (2015), Pages: 34, Volume: 2015, Issue: 146, DOI: https://doi.org/10.5089/9781513513621.001, Stock No: WPIEA2015146, ISBN: 9781513513621, ISSN: 1018-5941