{
  "title": "When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests",
  "publication": "IMF Working Papers, May 29, 2020",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2020/05/29/when-banks-punch-back-macrofinancial-feedback-loops-in-stress-tests-49209",
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  "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.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Title: When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests\n- Authors: Mario Catalan, Alexander W. Hoffmaister\n- Date: May 29, 2020\n- Core contribution: Develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into a standard macroeconomic structural vector autoregressive model to analyze macro-financial feedback loops."
    },
    {
      "heading": "Model and methods",
      "content": "- Model name: credit response and externalities analysis model (CREAM).\n- Integration: disaggregated banking sector embedded in a macroeconomic structural vector autoregressive framework.\n- Focus: banking-sector heterogeneity in lending responses and the propagation of externalities through macro-financial feedback loops."
    },
    {
      "heading": "Key findings",
      "content": "- Simultaneous capital losses across multiple banks can prompt banks to contract their balance sheets, generating externalities that propagate as macro-financial feedback loops.\n- Accounting for macro-financial feedback loops can significantly affect:\n  - macroeconomic outcomes, and\n  - bank-specific stress test results.\n- Heterogeneity in bank lending responses matters:\n  - It determines how each bank fares under adverse conditions.\n  - It determines the external effects that banks impose on each other and on economic activity.\n- The model can be used to assess contributions of individual banks to systemic risk along the time dimension."
    },
    {
      "heading": "Implications for stress testing and systemic risk analysis",
      "content": "- Stress tests that omit macro-financial feedback loops may misstate both macroeconomic impacts and individual bank vulnerabilities.\n- Disaggregated bank-level analysis of lending responses is essential to:\n  - understand bank-specific outcomes under adverse shocks, and\n  - identify the externalities banks impose on the broader economy and on each other.\n- CREAM provides a tool to attribute systemic risk contributions to individual banks over time.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2020/05/29/when-banks-punch-back-macrofinancial-feedback-loops-in-stress-tests-49209"
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    "Authors: Mario Catalan, Alexander W. Hoffmaister",
    "Published: May 29, 2020",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513534916.001",
    "Title: When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests",
    "Authors: Mario Catalan, Alexander W. Hoffmaister",
    "Date: May 29, 2020",
    "Core contribution: Develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into a standard macroeconomic structural vector autoregressive model to analyze macro-financial feedback loops.",
    "Model name: credit response and externalities analysis model (CREAM).",
    "Integration: disaggregated banking sector embedded in a macroeconomic structural vector autoregressive framework.",
    "Focus: banking-sector heterogeneity in lending responses and the propagation of externalities through macro-financial feedback loops.",
    "Simultaneous capital losses across multiple banks can prompt banks to contract their balance sheets, generating externalities that propagate as macro-financial feedback loops.",
    "Accounting for macro-financial feedback loops can significantly affect:",
    "Heterogeneity in bank lending responses matters:",
    "The model can be used to assess contributions of individual banks to systemic risk along the time dimension.",
    "Stress tests that omit macro-financial feedback loops may misstate both macroeconomic impacts and individual bank vulnerabilities.",
    "Disaggregated bank-level analysis of lending responses is essential to:",
    "CREAM provides a tool to attribute systemic risk contributions to individual banks over time.",
    "**Working Paper**"
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