Policy uncertainty and bank stress testing

Paul Kupiec

Journal of Financial Stability, 2020, vol. 51, issue C

Abstract: The accuracy of dynamic stress-test capital models remains undocumented. Three methodologies: a CLASS-style approach, Bayesian model averaging, and a Lasso specification are used to forecast the performance of 14 large US banks during the financial crisis. Individual bank models are calibrated using bank historical data while regulatory models are calibrated using representative bank data. Representative bank model forecasts differ dramatically from the forecasts from bank-specific models and from actual outcomes. The Lasso methodology is most accurate, but its superiority may be sample-specific and is only apparent ex post. The results highlight the policy uncertainty inherent in regulatory stress tests.

Keywords: Bank stress test model accuracy (search for similar items in EconPapers)
JEL-codes: C11 C53 C58 G17 G21 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Working Paper: Policy uncertainty and bank stress testing (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:51:y:2020:i:c:s1572308920300607

DOI: 10.1016/j.jfs.2020.100761

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