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Cyclical tail risk

In: (Mis)managing Macroprudential Expectations

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Abstract

This chapter presents an analysis on the cyclical tail risks generated by three calculative devices, namely Expected Shortfall (ES), Growth-at-Risk (GAR) frameworks and Annual Cyclical Scenario (ACS) stress tests. It argues that the Bank of England’s adoption of GAR and ACS stress testing -and the announcement that ES models will be used to manage market risk- are attempts to manage expectations that regulated banks can be expected to hold about the willingness of this ‘macroprudential’ central bank to intervene amid financial market stress. In such a way, intra-actions of ES, GAR and ACS stress tests and regulatory policy tools force banks to accept greater liability for the risks they take. This chapter discusses the limitations of this approach. The imminent adoption of ES raises appears to be a political compromise to minimize damage to the international competitiveness of UK banks, while the expectations management of GAR and ACS stress tests requires a predictability and routinisation that has allowed critics to question their purpose.

Suggested Citation

  • ., 2023. "Cyclical tail risk," Chapters, in: (Mis)managing Macroprudential Expectations, chapter 3, pages 42-66, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:20770_3
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    File URL: https://www.elgaronline.com/doi/10.4337/9781800887596.00010
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