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
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)
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Working Paper: When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:124:y:2022:i:c:s0261560621002230
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