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Assessing financial stability: the Capital and Loss Assessment under Stress Scenarios (CLASS) model

Meru Bhanot, Beverly Hirtle, Anna Kovner and James Vickery ()

No 663, Staff Reports from Federal Reserve Bank of New York

Abstract: The CLASS model is a top-down capital stress testing framework that uses public data, simple econometric models, and auxiliary assumptions to project the effect of macroeconomic scenarios on U.S. banking firms. Through the lens of the model, we find that the total banking system capital shortfall under stressful macroeconomic conditions began to rise four years before the financial crisis, peaking in the fourth quarter of 2008. The capital gap has since fallen sharply, and is now significantly below pre-crisis levels. In the cross section, banking firms estimated to be most sensitive to macroeconomic conditions also have higher capital ratios, consistent with a ?precautionary? view of bank capital, though this behavior is evident only since the crisis. We interpret our results as evidence that the resiliency of the U.S. banking system has improved since the financial crisis, and also as an illustration of the value of stress testing as a macroprudential policy tool.

Keywords: capital; stress testing; financial stability (search for similar items in EconPapers)
JEL-codes: G01 G17 G21 (search for similar items in EconPapers)
Date: 2014-02-01, Revised 2015-07-01
New Economics Papers: this item is included in nep-ban and nep-cfn
Note: Previous title: “The Capital and Loss Assessment under Stress Scenarios (CLASS) Model”
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Journal Article: Assessing financial stability: The Capital and Loss Assessment under Stress Scenarios (CLASS) model (2016) Downloads
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