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Enhancing Stress Tests by Adding Macroprudential Elements

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Abstract

The use of stress testing for macroprudential objectives is advanced by modeling spillovers within the financial sector or between the real and financial sectors. In this chapter, we discuss several macroprudential elements that capture these spillovers and how they might be added to stress test frameworks. We show how funding spillovers can be modeled as an add-on, using a reduced-form relation between banks' funding cost, bank capital and economic activity. Using a calibration to US data, we project very modest funding spillovers conditional on the DFAST 2018 severely adverse scenario. We describe the pros and cons of modeling different types of spillovers using this approach.

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  • William F. Bassett & David E. Rappoport, 2022. "Enhancing Stress Tests by Adding Macroprudential Elements," Finance and Economics Discussion Series 2022-022, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2022-22
    DOI: 10.17016/FEDS.2022.022
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    Cited by:

    1. Morell, Joe & Rice, Jonathan & Shaw, Frances, 2022. "A Framework for Macroprudential Stress Testing," Research Technical Papers 7/RT/22, Central Bank of Ireland.

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    More about this item

    Keywords

    Bank capital; Funding shocks; Macroprudential policy; Stress testing;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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