Assessing Financial Stability: The Capital and Loss Assessment under Stress Scenarios (CLASS) Model

95 Pages Posted: 12 Feb 2014 Last revised: 5 Aug 2015

See all articles by Beverly Hirtle

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department

Anna Kovner

Federal Reserve Bank of New York

James I. Vickery

Federal Reserve Bank of New York

Meru Bhanot

University of Chicago - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: July 2015

Abstract

The CLASS model is a top-down capital stress testing framework that uses public data, simple econometric models and auxiliary assumptions to project the effect of macroeconomic scenarios on U.S. banking firms. Through the lens of the model, we find that the total banking system capital shortfall under stressful macroeconomic conditions began to rise four years before the financial crisis, peaking in the fourth quarter of 2008. The capital gap has since fallen sharply, and is now significantly below pre-crisis levels. In the cross-section, banking firms estimated to be most sensitive to macroeconomic conditions also have higher capital ratios, consistent with a “precautionary” view of bank capital, though this behavior is evident only since the crisis. We interpret our results as evidence that the resiliency of the U.S. banking system has improved since the financial crisis, and also as an illustration of the value of stress testing as a macroprudential policy tool.

Keywords: capital, bank, stress testing, financial stability

JEL Classification: G21, G17, G01

Suggested Citation

Hirtle, Beverly and Kovner, Anna and Vickery, James Ian and Bhanot, Meru, Assessing Financial Stability: The Capital and Loss Assessment under Stress Scenarios (CLASS) Model (July 2015). FRB of New York Staff Report No. 663. Available at SSRN: https://ssrn.com/abstract=2394109 or http://dx.doi.org/10.2139/ssrn.2394109

Beverly Hirtle (Contact Author)

Federal Reserve Bank of New York - Banking Studies Department ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7544 (Phone)
212-720-8363 (Fax)

Anna Kovner

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

James Ian Vickery

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Meru Bhanot

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
8485654970 (Phone)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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