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A bank-level early warning model and its uses in macroprudential policy

Author

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  • Lang, J. H.

Abstract

This article outlines a top-down macroprudential extension of the supervisory system-wide bank stress test. The extension is based on an analytical framework developed by ECB staff. It starts with projections of banks’ profitability and solvency based on the assumption that loan volumes change depending on the common baseline and adverse macro-financial scenario. Banks are then assumed to adjust to a specific capital ratio target under stress, at least partially by reducing their risk-weighted assets, leading to an ex ante negative loan supply shock. The resulting deterioration of macro-financial conditions would negatively affect bank solvency. Additionally, contagion and spillovers both within the banking sector and across economic sectors further erode banks’ capital. JEL Classification: G00

Suggested Citation

  • Lang, J. H., 2016. "A bank-level early warning model and its uses in macroprudential policy," Macroprudential Bulletin, European Central Bank, vol. 1.
    • Handle: RePEc:ecb:ecbmbu:2016:0001:3
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    File URL: https://www.ecb.europa.eu/pub/pdf/other/ecbmpbu201603.en.pdf
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    Cited by:

    1. Cabral, Inês & Detken, Carsten & Fell, John & Henry, Jérôme & Hiebert, Paul & Kapadia, Sujit & Pires, Fatima & Salleo, Carmelo & Constâncio, Vítor & Nicoletti Altimari, Sergio, 2019. "Macroprudential policy at the ECB: Institutional framework, strategy, analytical tools and policies," Occasional Paper Series 227, European Central Bank.

    More about this item

    Keywords

    financial stability; macroprudential policy; warning model;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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