Advancements in stress-testing methodologies for financial stability applications

Katarzyna Budnik (), Aurea Marques, Carla Giglio, Alberto Grassi, Agha Durrani, Juan Figueres, Paul Konietschke, Catherine Le Grand, Julian Metzler, Francisco Javier Población García, Frances Shaw, Johannes Groß, Matthias Sydow, Fabio Franch, Oana-Maria Georgescu, Aljosa Ortl, Zoe Trachana and Yasmine Chalf

No 348, Occasional Paper Series from European Central Bank

Abstract: This paper provides an overview of stress-testing methodologies in Europe, with a focus on the advancements made by the European Central Bank’s Financial Stability Committee Working Group on Stress Testing (WGST). Over a four-year period, the WGST played a pivotal role in refining stress-testing practices, promoting collaboration among central banks and supervisory authorities and addressing challenges in the evolving financial landscape. The paper discusses the development and application of various stress-testing models, including top-down models, macro-micro models and system-wide models. It highlights the integration of new datasets and model validation efforts as well as the expanded use of stress-testing methodologies in risk and policy evaluation and in communication. The collaborative efforts of the WGST have demystified stress-testing methodologies and fostered trust among stakeholders. The paper concludes by outlining the future agenda for continued improvements in stress-testing practices. JEL Classification: G21, G28, C58, G01, G18

Keywords: Basel III; communication; COVID-19 mitigation; economic activity; financial system model; impact assessment; lending; macro-financial scenarios; prudential policies; stress testing; uncertainty; Working Group on Stress Testing (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-fdg and nep-mon
Note: 1355359
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