An Integrated Macroprudential Stress Test of Bank Liquidity and Solvency

Southampton Business School Working Paper Series # 16-86

45 Pages Posted: 27 Nov 2017 Last revised: 16 May 2019

See all articles by Mohamed Bakoush

Mohamed Bakoush

University of Southampton - Southampton Business School

Enrico Gerding

University of Southampton - School of Electronics and Computer Science (ECS)

Simon Wolfe

University of Southampton - School of Management; University of Southampton - Southampton Business School

Date Written: November 19, 2016

Abstract

We develop a macroprudential stress test to assess the resilience of banking systems. The proposed approach integrates liquidity risk and solvency risk and provides a convenient method to estimate the change in both of them based on the evolution of financial distress within the banking system. We estimate this evolution of financial distress using a new measure of systemic distress that incorporates microprudential as well as macroprudential risks in the banking system network. The proposed stress test provides output metrics that capture idiosyncratic as well as systemic economic risks at the level of an individual bank and the banking system as a whole. The empirical application of the stress test framework to the U.S. banking system shows how it can be effectively used to identify the systemic vulnerability of individual banks and the resilience of the system as a whole to economic risks. It also shows how the proposed approach can be effective for monitoring and assessing systemic interdependencies among banks.

Keywords: Solvency; Liquidity; Macroprudential Policy; Stress Testing; Systemic Risk; Networks

JEL Classification: G01; G21; G28

Suggested Citation

Bakoush, Mohamed and Gerding, Enrico and Wolfe, Simon, An Integrated Macroprudential Stress Test of Bank Liquidity and Solvency (November 19, 2016). Southampton Business School Working Paper Series # 16-86 . Available at SSRN: https://ssrn.com/abstract=3075521 or http://dx.doi.org/10.2139/ssrn.3075521

Mohamed Bakoush (Contact Author)

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

Enrico Gerding

University of Southampton - School of Electronics and Computer Science (ECS) ( email )

University Road
Southampton
United Kingdom

Simon Wolfe

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

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