Macroprudential stress‑test models: a survey

David Aikman (), Daniel Beale (), Adam Brinley-Codd (), Giovanni Covi, Anne‑Caroline Hüser () and Caterina Lepore ()
Additional contact information
David Aikman: King’s College, London
Daniel Beale: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Adam Brinley-Codd: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Anne‑Caroline Hüser: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Caterina Lepore: International Monetary Fund

No 1037, Bank of England working papers from Bank of England

Abstract: We survey the rapidly developing literature on macroprudential stress‑testing models. In scope are 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 twofold: 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 policymakers 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 policymakers 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; sectoral interlinkages; macroprudential policy (search for similar items in EconPapers)
JEL-codes: G21 G22 G23 G32 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2023-08-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-fdg, nep-ger and nep-rmg
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Working Paper: Macro-Prudential Stress Test Models: A Survey (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1037

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