Macro-Prudential Stress Test Models: A Survey

50 Pages Posted: 6 Sep 2023 Last revised: 20 Sep 2023

See all articles by David Aikman

David Aikman

Bank of England - Monetary Assessment and Strategy Division

Daniel Beale

Bank of England

Adam Brinley Codd

Bank of England

Giovanni Covi

Bank of England

Anne-Caroline Hüser

Bank of England

Caterina Lepore

International Monetary Fund (IMF)

Abstract

In this paper, we survey the rapidly developing literature on macroprudential stress-testing models. The scope of the survey includes models of contagion between banks, models of contagion within the wider financial system including non-bank financial institutions such as investment funds, and models that emphasise the two-way interaction between the financial sector and the real economy. Our aim is two-fold: first, to provide a reference guide of the state-of-the-art for those developing such models; second, to distil insights from this endeavour for policy-makers using these models. In our view, the modelling frontier faces three main challenges: (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress, (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress and (c) stress testing models that incorporate comprehensive two-way interactions between the financial system and the real economy. Emerging lessons for policy-makers are that, for a given-sized shock hitting the system, its eventual impact will depend on (a) the size of financial institutions' capital and liquidity buffers, (b) the liquidation strategies financial institutions adopt when they need to raise cash, and (c) the topology of the financial network.

Keywords: Stress testing, system-wide models, contagion, systemic risk, market-based finance, real-financial linkages, macro-prudential policy., bank resilience channel, modelling frontier, bank financial system, models of contagion, variation margin, Asset liquidity, Commercial banks, Liquidity, Solvency, Global

JEL Classification: F31, E26, G21, G22, G23, G32, G11, G28, G33

Suggested Citation

Aikman, David and Beale, Daniel and Brinley Codd, Adam and Covi, Giovanni and Hüser, Anne-Caroline and Lepore, Caterina, Macro-Prudential Stress Test Models: A Survey. IMF Working Paper No. 2023/173, Available at SSRN: https://ssrn.com/abstract=4557159 or http://dx.doi.org/10.5089/9798400253058.001

David Aikman

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Daniel Beale

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Adam Brinley Codd

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Giovanni Covi

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Anne-Caroline Hüser

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Caterina Lepore (Contact Author)

International Monetary Fund (IMF) ( email )

Kuwait

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
64
Abstract Views
241
Rank
704,338
PlumX Metrics