Integrating stress tests within the Basel III capital framework: a macroprudentially coherent approach

Pierluigi Bologna and Anatoli Segura

No 360, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In the post-crisis era banks� capital adequacy is established by the Basel III capital standards and, in many jurisdictions, also by supervisory stress tests. In this paper we first describe the ways in which supervisory stress tests can supplement the risk-based capital framework of Basel III and how this could be codified with a stress test buffer. We then argue that in order to ensure coherence with the macroprudential objectives of Basel III, the severity of supervisory stress tests should be procyclical. In addition, to increase the transparency and predictability of the overall capital framework, severity choices should follow a constrained discretion approach based on a simple rule. Finally, we analyze supervisory stress testing practices across some jurisdictions and find that while the United States and the UK frameworks are in line with some of the elements of our proposal, including most notably the need for procyclical severity, this is not the case in the euro area.

Keywords: stress test; capital regulation; macroprudential policy (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Integrating Stress Tests within the Basel III Capital Framework: A Macroprudentially Coherent Approach (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_360_16

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