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A macro stress testing model with feedback effects

Mizuho Kida

No DP2008/08, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: Stress testing is a tool to analyse the resilience of a financial system under extreme shocks. In contrast to single-bank stress testing models, macro stress testing models attempt to analyse risk for the system as a whole by taking into account feedback – i.e. the transmission of risks – within the system or between the financial system and the real economy. This paper develops a simple model of macro stress testing, incorporating two types of feedback: one between credit and interest rate risks and another between the banking system and the real economy. The model is tested using hypothetical banking sector data. The results from the exercise highlight the importance of incorporating feedback effects for the assessment of total risks to the system, and of recognising more than one type of feedback effect in a model for a robust assessment of risks to financial stability.

JEL-codes: G21 G32 (search for similar items in EconPapers)
Pages: 37 p.
Date: 2008-05
New Economics Papers: this item is included in nep-cba and nep-cfn
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