EconPapers    
Economics at your fingertips  
 

When banks punch back: Macrofinancial feedback loops in stress tests

Mario Catalán and Alexander Hoffmaister ()

Journal of International Money and Finance, 2022, vol. 124, issue C

Abstract: In the presence of adverse macroeconomic shocks, simultaneous capital losses in multiple banks can prompt them to contract their balance sheets. These bank responses generate externalities that propagate in the form of macrofinancial feedback loops. This paper develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into an otherwise standard macroeconomic structural vector autoregressive model. It shows that accounting for macrofinancial feedback loops can significantly affect macroeconomic outcomes and bank-specific stress test results. The heterogeneity in bank lending responses matters: it determines how each bank fares under adverse conditions and the external effects that banks impose on each other and on economic activity. The model can thus be used to assess the contributions of individual banks to systemic risk along the time dimension.

Keywords: Macrofinancial amplification; Stress testing; Systemic risk; Feedback loops; Bank lending; Bank capital (search for similar items in EconPapers)
JEL-codes: D62 E32 E37 G01 G21 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560621002230
Full text for ScienceDirect subscribers only

Related works:
Working Paper: When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:124:y:2022:i:c:s0261560621002230

DOI: 10.1016/j.jimonfin.2021.102572

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2022-07-27
Handle: RePEc:eee:jimfin:v:124:y:2022:i:c:s0261560621002230