Enhancing Stress Tests by Adding Macroprudential Elements

William F. Bassett and David E. Rappoport
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William F. Bassett: https://www.federalreserve.gov/econres/william-f-bassett.htm
David E. Rappoport: https://www.federalreserve.gov/econres/david-e-rappoport.htm

No 2022-022, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The use of stress testing for macroprudential objectives is advanced by modeling spillovers within the financial sector or between the real and financial sectors. In this chapter, we discuss several macroprudential elements that capture these spillovers and how they might be added to stress test frameworks. We show how funding spillovers can be modeled as an add-on, using a reduced-form relation between banks' funding cost, bank capital and economic activity. Using a calibration to US data, we project very modest funding spillovers conditional on the DFAST 2018 severely adverse scenario. We describe the pros and cons of modeling different types of spillovers using this approach.

Keywords: Bank capital; Funding shocks; Macroprudential policy; Stress testing (search for similar items in EconPapers)
JEL-codes: E58 G28 (search for similar items in EconPapers)
Pages: 46 p.
Date: 2022-05-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-22

DOI: 10.17016/FEDS.2022.022

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