When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests

By Mario Catalan, Alexander W. Hoffmaister

May 29, 2020

Preview Citation

Format: Chicago

Mario Catalan, and Alexander W. Hoffmaister When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests, (USA: International Monetary Fund, 2020) accessed July 11, 2025

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

In the presence of adverse macroeconomic shocks, simultaneous capital losses in multiple banks can prompt them to contract their balance sheets. These bank responses generate externalities that propagate in the form of macro-financial feedback loops. This paper develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into an otherwise standard macroeconomic structural vector autoregressive model. It shows that accounting for macro-financial feedback loops can significantly affect macroeconomic outcomes and bank-specific stress tests results. The heterogeneity in bank lending responses matters: it determines how each bank fares under adverse conditions and the external effects that banks impose on each other and on economic activity. The model can thus be used to assess the contributions of individual banks to systemic risk along the time dimension.

Subject: Bank credit, Banking, Capital adequacy requirements, Financial institutions, Financial regulation and supervision, Financial services, Financial statements, Loans, Money, Public financial management (PFM), Yield curve

Keywords: Aggregate bank result, Balance sheet, Bank, Bank capitalization ratios, Bank credit, Bank externality, Bank lending, Bank loss, Bank profit, Bank profit and loss, Banking sector, Capital adequacy requirements, Credit expansion, Financial statements, Funding cost, Global, Lending rate, Loan portfolio, Loans, Macroeconomic shocks, Modeling, Quasi-static behavior, Real GDP, Risk weight, Stress tests, Stress tests result, Vulnerability ranking, WP, Yield curve, Yield curve

Publication Details

Pages:

65
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2020/072
Stock No:

WPIEA2020072
ISBN:

9781513534916
ISSN:

1018-5941

IMF’s Work

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers