Macro-Prudential Stress Test Models: A Survey

David Aikman, Daniel Beale, Adam Brinley-Codd, Anne-Caroline Hüser, Giovanni Covi and Caterina Lepore

No 2023/173, IMF Working Papers from International Monetary Fund

Abstract: In this paper, we survey the rapidly developing literature on macroprudential stress-testing models. The scope of the survey includes models of contagion between banks, models of contagion within the wider financial system including non-bank financial institutions such as investment funds, and models that emphasise the two-way interaction between the financial sector and the real economy. Our aim is two-fold: first, to provide a reference guide of the state-of-the-art for those developing such models; second, to distil insights from this endeavour for policy-makers using these models. In our view, the modelling frontier faces three main challenges: (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress, (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress and (c) stress testing models that incorporate comprehensive two-way interactions between the financial system and the real economy. Emerging lessons for policy-makers are that, for a given-sized shock hitting the system, its eventual impact will depend on (a) the size of financial institutions' capital and liquidity buffers, (b) the liquidation strategies financial institutions adopt when they need to raise cash, and (c) the topology of the financial network.

Keywords: Stress testing; system-wide models; contagion; systemic risk; market-based finance; real-financial linkages; macro-prudential policy.; bank resilience channel; modelling frontier; bank financial system; models of contagion; variation margin; Asset liquidity; Commercial banks; Liquidity; Solvency; Global (search for similar items in EconPapers)
Pages: 50
Date: 2023-08-25
New Economics Papers: this item is included in nep-ban
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Working Paper: Macroprudential stress‑test models: a survey (2023)
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