Real-Time Financial Stability Assessment With an Application to the COVID-19 Crisis

35 Pages Posted: 26 Jun 2020 Last revised: 20 Jan 2022

See all articles by Henk Jan Reinders

Henk Jan Reinders

Rotterdam School of Management; Dutch Central Bank (DNB)

Dirk Schoenmaker

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM); Centre for Economic Policy Research (CEPR)

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 19, 2022

Abstract

The sudden and severe economic consequences of the Covid-19 pandemic have underlined the need for real-time financial stability assessments by banks and their supervisors, which are hampered by sluggish accounting-based provisioning. Using a Merton contingent claims framework, we develop a novel market-based approach to financial stability assessments – and apply it to assess euro area banks’ vulnerability to the Covid-19 crisis in real time. Although market-based indicators have improved considerably after an initial sharp downturn in March 2020, they still provide warning signals for a range of (sub)sectors. During the market low point, implied losses on corporate loans amounted to 12-38% of banks’ capital. We uncover a substantial role for monetary policy (lower discount rates) in the subsequent stock market recovery.

Keywords: Financial stability, bank capital, COVID-19, stress test

JEL Classification: G01, G21, G28

Suggested Citation

Reinders, Henk Jan and Schoenmaker, Dirk and Van Dijk, Mathijs A., Real-Time Financial Stability Assessment With an Application to the COVID-19 Crisis (January 19, 2022). Available at SSRN: https://ssrn.com/abstract=3633932 or http://dx.doi.org/10.2139/ssrn.3633932

Henk Jan Reinders

Rotterdam School of Management ( email )

Dutch Central Bank (DNB) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

Dirk Schoenmaker (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam
Netherlands

HOME PAGE: http://www.rsm.nl/people/dirk-schoenmaker/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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