How to Capture Macro-Financial Spillover Effects in Stress Tests?
IMF Working Papers, June 12, 2014
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Bibliographic details
- Authors: Heiko Hesse, Ferhan Salman, Christian Schmieder
- Published: June 12, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498379083.001
Authors and publication
- By Heiko Hesse, Ferhan Salman, Christian Schmieder
- June 12, 2014
- IMF Working Paper No. 2014/103
- Volume: 2014; Issue: 103; Pages: 34
- DOI: https://doi.org/10.5089/9781498379083.001
- ISBN: 9781498379083
- ISSN: 1018-5941
- Stock No: WPIEA2014103
Research objective and scope
- Address the challenge of establishing scenarios with meaningful macro-financial linkages for financial stability analysis and bank stress testing.
- Simulate the potential impact of spillover effects based on the “traditional” design of macro-economic stress tests.
- Examine spillover effects observed during the financial crisis and simulate their impact on banks’ liquidity and capital positions.
Key findings
- Spillover effects have a highly non-linear impact on bank soundness.
- Both liquidity and solvency of banks are materially affected when spillover effects and contagion are taken into account.
Methodological approach
- Use simulations grounded in the “traditional” design of macro-economic stress tests to capture spillover dynamics.
- Focus on translating observed crisis-period spillovers into impacts on bank-level liquidity and capital positions.
Thematic coverage and keywords
- Subject areas: Asset and liability management; Banking; Financial sector policy and analysis; Liquidity; Liquidity stress testing; Solvency; Solvency stress testing; Stress testing.
- Keywords: bank; bank level; bank reaction; bank solvency; Contagion; Global; IMF liquidity stress; Liquidity; Liquidity stress testing; Macro-financial linkages; measures bank; Scenarios; Solvency; solvency risk; Solvency stress testing; Spillover; spillover effect; Stress testing; WP
Practical implications and outlook
- Integrating macro-financial spillover effects into stress tests is critical for realistic assessment of bank liquidity and solvency under crisis scenarios.
- The non-linear nature of spillover impacts implies that stress-test designs should account for amplifying contagion channels rather than assuming linear propagation of shocks.
Source: IMF Working Paper No. 2014/103, “How to Capture Macro-Financial Spillover Effects in Stress Tests?”, Heiko Hesse, Ferhan Salman, Christian Schmieder, June 12, 2014.