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An integrated macroprudential stress test of bank liquidity and solvency

Mohamed Bakoush, Enrico Gerding, Tapas Mishra () and Simon Wolfe

Journal of Financial Stability, 2022, vol. 60, issue C

Abstract: We propose a new measure of systemic financial distress that incorporates idiosyncratic and systemic risks in the financial system network. Using this measure, we develop an integrated stress test of bank liquidity and solvency risks based on the dynamics of financial distress within the banking system network. We apply this stress test framework to the US banking system and identify systemic vulnerability of individual banks as well as the resilience of the system as a whole to an economic shock. The framework helps us identify and monitor systemic interdependencies between banks. The proposed stress testing framework is useful for practical macroprudential monitoring and is informative for policy making.

Keywords: Solvency; Liquidity; Macroprudential policy; Stress testing; Systemic risk; Networks (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:60:y:2022:i:c:s1572308922000377

DOI: 10.1016/j.jfs.2022.101012

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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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