Can Macro Variables Used in Stress Testing Forecast the Performance of Banks?

30 Pages Posted: 22 Dec 2012

See all articles by Luca Guerrieri

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Michelle Welch

Board of Governors of the Federal Reserve System

Date Written: July 23, 2012

Abstract

When stress tests for the banking sector use a macroeconomic scenario, an unstated premise is that macro variables should be useful factors in forecasting the performance of banks. We assess whether variables such as the ones included in stress tests for U.S. bank holding companies help improve out of sample forecasts of chargeoffs on loans, revenues, and capital measures, relative to forecasting models that exclude a role for macro factors. Using only public data on bank performance, we find the macro variables helpful, but not for all measures. Moreover, even our best-performing models imply bands of uncertainty around the forecasts so large as to make it challenging to distinguish the implications of alternative macro scenarios.

Keywords: Forecast combinations, macro variables, banking conditions, stress test

JEL Classification: C53, G17, G38

Suggested Citation

Guerrieri, Luca and Welch, Michelle, Can Macro Variables Used in Stress Testing Forecast the Performance of Banks? (July 23, 2012). FEDS Working Paper No. 2012-49. Available at SSRN: https://ssrn.com/abstract=2192650 or http://dx.doi.org/10.2139/ssrn.2192650

Luca Guerrieri (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Michelle Welch

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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