## When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests

_IMF Working Papers, May 29, 2020_

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## Bibliographic details
- Authors: Mario Catalan, Alexander W. Hoffmaister
- Published: May 29, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513534916.001

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### Overview
- 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 and methods
- 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.

### Key findings
- 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:
  - macroeconomic outcomes, and
  - bank-specific stress test results.
- Heterogeneity in bank lending responses matters:
  - It determines how each bank fares under adverse conditions.
  - It determines the external effects that banks impose on each other and on economic activity.
- The model can be used to assess contributions of individual banks to systemic risk along the time dimension.

### Implications for stress testing and systemic risk analysis
- 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:
  - understand bank-specific outcomes under adverse shocks, and
  - identify the externalities banks impose on the broader economy and on each other.
- CREAM provides a tool to attribute systemic risk contributions to individual banks over time.

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2020/05/29/when-banks-punch-back-macrofinancial-feedback-loops-in-stress-tests-49209_