Design of Macro-prudential Stress Tests

Dmitry Orlov, Andrzej Skrzypacz and Pavel Zryumov
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Dmitry Orlov: University of Rochester
Pavel Zryumov: University of Rochester

No 913, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We study the design of macro-prudential stress tests and capital requirements. The tests provide information about correlation in banks portfolios. The regulator chooses contingent capital requirements that create a liquidity buffer in case of a fire sale. The optimal stress test discloses information partially: when systemic risk is low, capital requirements reflect full information; when systemic risk is high, the regulator pools information and requires all banks to hold precautionary liquidity. With heterogeneous banks, weak banks determine the level of transparency and strong banks are often required to hold excess capital when systemic risk is high. Moreover, dynamic disclosure and capital adjustments can improve welfare.

Date: 2018
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ifn
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: The Design of Macroprudential Stress Tests (2023)
Working Paper: Design of Macro-prudential Stress Tests (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:913

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