{
  "title": "Towards Macroprudential Stress Testing: Incorporating Macro-Feedback Effects",
  "publication": "IMF Working Papers, June 30, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/06/30/towards-macroprudential-stress-testing-incorporating-macro-feedback-effects-44955",
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  "summary": "Macro-feedback effects have been identified as a key missing element for more effective macro-prudential stress testing. To fill this gap, this paper develops a framework that facilitates the analysis of both the direct effects of macroeconomic shocks on the solvency of individual banks and feedback",
  "sections": [
    {
      "heading": "Overview and purpose",
      "content": "- Authors: Ivo Krznar, Troy D Matheson\n- Date: June 30, 2017\n- Purpose: Develop a framework to analyze both the direct effects of macroeconomic shocks on individual-bank solvency and the feedback effects that amplify and propagate shocks via bank deleveraging and credit crunches.\n- Approach: Embed a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomic model to ensure consistency between macroeconomic and financial variables and banks’ balance sheets."
    },
    {
      "heading": "Key findings and contributions",
      "content": "- Macro-feedback effects are identified as a key missing element for more effective macro-prudential stress testing.\n- The proposed framework:\n  - Facilitates analysis of direct macroeconomic shock impacts on bank solvency.\n  - Captures feedback effects arising from bank deleveraging and credit crunches that can amplify and propagate shocks.\n  - Ensures consistency in key relationships between macroeconomic variables, financial variables, and banks’ balance sheets.\n- The framework strengthens stress testing and macro-financial analysis by integrating micro-level bank data with macroeconomic dynamics.\n- The paper provides preliminary simulations of feedback effects specifically arising from the link between liquidity and solvency risk."
    },
    {
      "heading": "Applications and extensions",
      "content": "- The framework has numerous applications to enhance stress testing and macrofinancial surveillance.\n- It provides an avenue for extensions to incorporate additional second-round effects important for systemic risk analysis, including interactions between:\n  - Solvency risk\n  - Liquidity risk\n  - Contagion risk"
    },
    {
      "heading": "Subject coverage and keywords",
      "content": "- Subjects: Banking; Capital adequacy requirements; Countercyclical capital buffers; Credit; Financial regulation and supervision; Financial sector policy and analysis; Income; Money; National accounts; Personal income; Stress testing\n- Keywords: A. macro module; balance sheet dynamics; bank; banking sector; Capital adequacy requirements; capital requirement shock; Countercyclical capital buffers; Credit; credit crunch; credit gap; credit impulse response; credit shock; credit supply; Global; impulse response; Income; income statement; income statement item; loss absorbency level; macro feedback effect; macro feedback effects; panel credit equation; Personal income; portfolio adjustment; projections of capital ratio; solvency position; solvency problem; solvency risk; stress testing; WP\n\n---\n\n Content in this bundle\n\n- Towards Macroprudential Stress Testing: Incorporating Macro Feedback Effects, WP/17/149, June 2017\n  - Towards Macroprudential Stress Testing: Incorporating Macro Feedback Effects, WP/17/149, June 2017 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Towards Macroprudential Stress Testing: Incorporating Macro Feedback Effects, WP/17/149, June 2017 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/06/30/towards-macroprudential-stress-testing-incorporating-macro-feedback-effects-44955"
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    "Authors: Ivo Krznar, Troy D Matheson",
    "Published: June 30, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484303634.001",
    "Authors: Ivo Krznar, Troy D Matheson",
    "Date: June 30, 2017",
    "Purpose: Develop a framework to analyze both the direct effects of macroeconomic shocks on individual-bank solvency and the feedback effects that amplify and propagate shocks via bank deleveraging and credit crunches.",
    "Approach: Embed a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomic model to ensure consistency between macroeconomic and financial variables and banks’ balance sheets.",
    "Macro-feedback effects are identified as a key missing element for more effective macro-prudential stress testing.",
    "The proposed framework:",
    "The framework strengthens stress testing and macro-financial analysis by integrating micro-level bank data with macroeconomic dynamics.",
    "The paper provides preliminary simulations of feedback effects specifically arising from the link between liquidity and solvency risk.",
    "The framework has numerous applications to enhance stress testing and macrofinancial surveillance.",
    "It provides an avenue for extensions to incorporate additional second-round effects important for systemic risk analysis, including interactions between:",
    "Subjects: Banking; Capital adequacy requirements; Countercyclical capital buffers; Credit; Financial regulation and supervision; Financial sector policy and analysis; Income; Money; National accounts; Personal income; Stress testing",
    "Keywords: A. macro module; balance sheet dynamics; bank; banking sector; Capital adequacy requirements; capital requirement shock; Countercyclical capital buffers; Credit; credit crunch; credit gap; credit impulse response; credit shock; credit supply; Global; impulse response; Income; income statement; income statement item; loss absorbency level; macro feedback effect; macro feedback effects; panel credit equation; Personal income; portfolio adjustment; projections of capital ratio; solvency position; solvency problem; solvency risk; stress testing; WP",
    "**Towards Macroprudential Stress Testing: Incorporating Macro Feedback Effects, WP/17/149, June 2017**"
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