When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests

Mario Catalan and Alexander Hoffmaister

No 2020/072, IMF Working Papers from International Monetary Fund

Abstract: In the presence of adverse macroeconomic shocks, simultaneous capital losses in multiple banks can prompt them to contract their balance sheets. These bank responses generate externalities that propagate in the form of macro-financial feedback loops. This paper develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into an otherwise standard macroeconomic structural vector autoregressive model. It shows that accounting for macro-financial feedback loops can significantly affect macroeconomic outcomes and bank-specific stress tests results. The heterogeneity in bank lending responses matters: it determines how each bank fares under adverse conditions and the external effects that banks impose on each other and on economic activity. The model can thus be used to assess the contributions of individual banks to systemic risk along the time dimension.

Keywords: WP; balance sheet; bank; bank lending; lending rate; risk weight; real GDP; stress tests result; credit expansion; yield curve; bank capitalization ratios; loan portfolio; bank loss; bank externality; bank profit and loss; Loans; Bank credit; Capital adequacy requirements; Financial statements; Yield curve; Global; Stress tests; macroeconomic shocks; banking sector; modeling; vulnerability ranking; quasi-static behavior; funding cost; bank profit; aggregate bank result (search for similar items in EconPapers)
Pages: 65
Date: 2020-05-29
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Citations: View citations in EconPapers (3)

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Journal Article: When banks punch back: Macrofinancial feedback loops in stress tests (2022)
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