Testing macroprudential stress tests: The risk of regulatory risk weights

Viral Acharya, Robert Engle and Diane Pierret

Journal of Monetary Economics, 2014, vol. 65, issue C, 36-53

Abstract: We compare the capital shortfall measured by regulatory stress tests, to that of a benchmark methodology — the “V-Lab stress test” — that employs only publicly available market data. We find that when capital shortfalls are measured relative to risk-weighted assets, the ranking of financial institutions is not well correlated to the ranking of the V-Lab stress test, whereas rank correlations increase when required capitalization is a function of total assets. We show that the risk measures used in risk-weighted assets are cross-sectionally uncorrelated with market measures of risk, as they do not account for the “risk that risk will change.” Furthermore, the banks that appeared to be best capitalized relative to risk-weighted assets were no better than the rest when the European economy deteriorated into the sovereign debt crisis in 2011.

Keywords: Macroprudential regulation; Stress test; Systemic risk; Risk-weighted assets (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (158)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393214000725
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Testing macroprudential stress tests: The risk of regulatory risk weights (2014)
Working Paper: Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights (2014)
Working Paper: Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights (2013)
Working Paper: Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights (2013)
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:moneco:v:65:y:2014:i:c:p:36-53

DOI: 10.1016/j.jmoneco.2014.04.014

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().