## Towards Macroprudential Stress Testing: Incorporating Macro-Feedback Effects

_IMF Working Papers, June 30, 2017_

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## Bibliographic details
- Authors: Ivo Krznar, Troy D Matheson
- Published: June 30, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484303634.001

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### Overview and purpose
- 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.

### Key findings and contributions
- Macro-feedback effects are identified as a key missing element for more effective macro-prudential stress testing.
- The proposed framework:
  - Facilitates analysis of direct macroeconomic shock impacts on bank solvency.
  - Captures feedback effects arising from bank deleveraging and credit crunches that can amplify and propagate shocks.
  - Ensures consistency in key relationships between macroeconomic variables, financial variables, and banks’ balance sheets.
- 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.

### Applications and extensions
- 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:
  - Solvency risk
  - Liquidity risk
  - Contagion risk

### Subject coverage and keywords
- 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

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## Content in this bundle

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_Source: https://www.imf.org/en/publications/wp/issues/2017/06/30/towards-macroprudential-stress-testing-incorporating-macro-feedback-effects-44955_