Bank solvency stress tests with fire sales

Thomas Breuer, Martin Summer and Branko Urošević

Journal of Financial Stability, 2023, vol. 67, issue C

Abstract: We present a new framework combining current methods of bank solvency stress tests with a model of fire sales. We apply the framework to the stress tests conducted by the European Banking Authority. Fire sales are described by an equilibrium model balancing leverage improvements and drops in security prices. Additional bank losses caused by fire sales are significant and go beyond the trivial fact that with fire sales we will get bigger losses. Ignoring potential fire sales effects may lead to a false sense of resilience by assuming that institutions, which are in fact fragile, are resilient.

Keywords: Stress testing; Fire sales; Systemic risk (search for similar items in EconPapers)
JEL-codes: C18 C44 C60 G01 G32 M48 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:67:y:2023:i:c:s157230892300061x

DOI: 10.1016/j.jfs.2023.101161

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