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Stress Tests to Promote Financial Stability: Assessing Progress and Looking to the Future

Author

Listed:
  • Rick Bookstaber

    (Office of Financial Research)

  • Jill Cetina

    (Office of Financial Research)

  • Greg Feldberg

    (Office of Financial Research)

  • Mark Flood

    (Office of Financial Research)

  • Paul Glasserman

    (Columbia Business School, Columbia University)

Abstract

Stress testing, which has its roots in risk management, should be adapted to support financial stability monitoring and to incorporate the interconnections and dynamics of the financial system. Since the 2008 financial crisis, bank supervisors have honed their financial stability monitoring tools and significantly expanded the use of stress testing in the supervision of the largest financial institutions. This article describes areas in which further research could contribute to the development of best practices in stress testing and how bank supervisory stress tests can be made more useful for macroprudential supervision. We discuss both near-term and longer-term objectives.

Suggested Citation

  • Rick Bookstaber & Jill Cetina & Greg Feldberg & Mark Flood & Paul Glasserman, 2013. "Stress Tests to Promote Financial Stability: Assessing Progress and Looking to the Future," Working Papers 13-07, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:wpaper:13-07
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    References listed on IDEAS

    as
    1. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410, Central Bank of Chile.
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    5. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, vol. 12(C), pages 3-15.
    6. Richard Bookstaber, 2012. "Using Agent-Based Models for Analyzing Threats to Financial Stability," Working Papers 12-03, Office of Financial Research, US Department of the Treasury.
    7. Acharya, Viral & Engle, Robert & Pierret, Diane, 2014. "Testing macroprudential stress tests: The risk of regulatory risk weights," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 36-53.
    8. Thomas Breuer & Martin Jandacka & Klaus Rheinberger & Martin Summer, 2009. "How to Find Plausible, Severe and Useful Stress Scenarios," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 205-224, September.
    9. Paul Glasserman & Chulmin Kang & Wanmo Kang, 2013. "Stress Scenario Selection by Empirical Likelihood," Working Papers 13-04, Office of Financial Research, US Department of the Treasury.
    10. Gick, Wolfgang & Pausch, Thilo, 2012. "Persuasion by stress testing: Optimal disclosure of supervisory information in the banking sector," Discussion Papers 32/2012, Deutsche Bundesbank.
    11. Mark D. Flood & George G. Korenko, 2013. "Systematic Scenario Selection: Stress Testing and the Nature of Uncertainty," Working Papers 13-02, Office of Financial Research, US Department of the Treasury.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Office of Financial Research (ed.), 2013. "2013 Annual Report," Reports, Office of Financial Research, US Department of the Treasury, number 13-02, September.
    2. Wall, Larry, 2014. "Measuring capital adequacy: supervisory stress-tests in a Basel world," Journal of Financial Perspectives, EY Global FS Institute, vol. 2(1), pages 85-94.
    3. Budnik, Katarzyna & Groß, Johannes & Vagliano, Gianluca & Dimitrov, Ivan & Lampe, Max & Panos, Jiri & Velasco, Sofia & Boucherie, Louis & Jančoková, Martina, 2023. "BEAST: A model for the assessment of system-wide risks and macroprudential policies," Working Paper Series 2855, European Central Bank.
    4. Mark D. Flood & George G. Korenko, 2015. "Systematic scenario selection: stress testing and the nature of uncertainty," Quantitative Finance, Taylor & Francis Journals, vol. 15(1), pages 43-59, January.
    5. Michel Baes & Eric Schaanning, 2023. "Reverse stress testing: Scenario design for macroprudential stress tests," Mathematical Finance, Wiley Blackwell, vol. 33(2), pages 209-256, April.
    6. Levy-Carciente, Sary & Kenett, Dror Y. & Avakian, Adam & Stanley, H. Eugene & Havlin, Shlomo, 2015. "Dynamical macroprudential stress testing using network theory," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 164-181.
    7. Dror Y. Kenett & Sary Levy-Carciente & Adam Avakian & H. Eugene Stanley & Shlomo Havlin, 2015. "Dynamical Macroprudential Stress Testing Using Network Theory," Working Papers 15-12, Office of Financial Research, US Department of the Treasury.
    8. repec:ofr:wpaper:13-10 is not listed on IDEAS
    9. Pascal Traccucci & Luc Dumontier & Guillaume Garchery & Benjamin Jacot, 2019. "A Triptych Approach for Reverse Stress Testing of Complex Portfolios," Papers 1906.11186, arXiv.org.
    10. Pavel Kapinos & Oscar A. Mitnik, 2016. "A Top-down Approach to Stress-testing Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 229-264, June.
    11. repec:ofr:report:13-2 is not listed on IDEAS

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    More about this item

    Keywords

    Stress Tests; Financial Stability;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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