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Advancements in stress-testing methodologies for financial stability applications

Author

Listed:
  • Budnik, Katarzyna
  • Ponte Marques, Aurea
  • Giglio, Carla
  • Grassi, Alberto
  • Durrani, Agha
  • Figueres, Juan Manuel
  • Konietschke, Paul
  • Le Grand, Catherine
  • Metzler, Julian
  • Población García, Francisco Javier
  • Shaw, Frances
  • Groß, Johannes
  • Sydow, Matthias
  • Franch, Fabio
  • Georgescu, Oana-Maria
  • Ortl, Aljosa
  • Trachana, Zoe
  • Chalf, Yasmine

Abstract

This paper provides an overview of stress-testing methodologies in Europe, with a focus on the advancements made by the European Central Bank’s Financial Stability Committee Working Group on Stress Testing (WGST). Over a four-year period, the WGST played a pivotal role in refining stress-testing practices, promoting collaboration among central banks and supervisory authorities and addressing challenges in the evolving financial landscape. The paper discusses the development and application of various stress-testing models, including top-down models, macro-micro models and system-wide models. It highlights the integration of new datasets and model validation efforts as well as the expanded use of stress-testing methodologies in risk and policy evaluation and in communication. The collaborative efforts of the WGST have demystified stress-testing methodologies and fostered trust among stakeholders. The paper concludes by outlining the future agenda for continued improvements in stress-testing practices. JEL Classification: G21, G28, C58, G01, G18

Suggested Citation

  • Budnik, Katarzyna & Ponte Marques, Aurea & Giglio, Carla & Grassi, Alberto & Durrani, Agha & Figueres, Juan Manuel & Konietschke, Paul & Le Grand, Catherine & Metzler, Julian & Población García, Franc, 2024. "Advancements in stress-testing methodologies for financial stability applications," Occasional Paper Series 348, European Central Bank.
    • Handle: RePEc:ecb:ecbops:2024348
    Note: 1355359
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    More about this item

    Keywords

    Basel III; communication; COVID-19 mitigation; economic activity; financial system model; impact assessment; lending; macro-financial scenarios; prudential policies; stress testing; uncertainty; Working Group on Stress Testing;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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