A bank-level early warning model and its uses in macroprudential policy

Jan Hannes Lang

Macroprudential Bulletin, 2016, vol. 1

Abstract: This article outlines a top-down macroprudential extension of the supervisory system-wide bank stress test. The extension is based on an analytical framework developed by ECB staff. It starts with projections of banks’ profitability and solvency based on the assumption that loan volumes change depending on the common baseline and adverse macro-financial scenario. Banks are then assumed to adjust to a specific capital ratio target under stress, at least partially by reducing their risk-weighted assets, leading to an ex ante negative loan supply shock. The resulting deterioration of macro-financial conditions would negatively affect bank solvency. Additionally, contagion and spillovers both within the banking sector and across economic sectors further erode banks’ capital. JEL Classification: G00

Keywords: financial stability; macroprudential policy; warning model (search for similar items in EconPapers)
Date: 2016-03
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