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Incorporating funding costs in top-down stress tests

Søren Korsgaard

Journal of Financial Stability, 2021, vol. 52, issue C

Abstract: Central banks and supervisory authorities regularly conduct stress tests of banks. As losses accumulate in stress scenarios, banks’ equity position worsens, and they must pay higher interest rates to retain funding. I explore how variations of Merton-type models can be used to measure bank risk, and then examine the link between various risk measures and funding costs. Finally, I outline a method for incorporating funding cost increases into top-down stress tests.

Keywords: Stress testing; Funding costs; Risk measurement (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:52:y:2021:i:c:s1572308920300978

DOI: 10.1016/j.jfs.2020.100798

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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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