Enhanced Stress Testing and Financial Stability

43 Pages Posted: 12 Jun 2012

See all articles by Matt Pritsker

Matt Pritsker

Federal Reserve Bank of Boston

Date Written: May 15, 2012


To date, regulatory stress testing in the United States has focused on ensuring the banking system is resilient to losses in one or a few stress scenarios that involve macro-economic weakness, but it is unclear how far this resilience extends beyond the stresses considered. In addition, a theory of which stress-scenarios should be chosen to achieve systemic-risk reduction objectives has not yet been developed. To improve stress testing practices, this paper proposes a framework for modeling systemic risk. The framework is used to analyze areas where current stress-testing practices can be improved. In addition, the paper proposes a new approach for systemic risk stress-testing and recapitalization policy that ensure the banking system is robust to a wide set of shocks, but minimizes the costs of achieving robustness through better sharing of risk.

Keywords: Stress Testing, Financial Stability, Bank Capital Regulation

JEL Classification: G21, G28, G18

Suggested Citation

Pritsker, Matthew G., Enhanced Stress Testing and Financial Stability (May 15, 2012). Available at SSRN: https://ssrn.com/abstract=2082994 or http://dx.doi.org/10.2139/ssrn.2082994

Matthew G. Pritsker (Contact Author)

Federal Reserve Bank of Boston ( email )

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