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Bank Solvency Stress Tests with Fire Sales (Thomas Breuer, Martin Summer, Branko Urošević)

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Abstract

We present a simple and operational yet rigorous framework that combines current methods of bank solvency stress tests with a description of fire sales. We demonstrate the applicability of our framework to the EBA stress testing exercise. Fire sales are described by an equilibrium model which balances leverage improvements and drops in security prices. The differences in bank losses caused by fire sales are significant and go beyond the trivial fact that with deleveraging we will get bigger losses. It is shown that ignoring potential deleveraging effects can show institutions as resilient which are in fact fragile and thus create a false sense of resilience.

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  • Thomas Breuer & Martin Summer & Branko Urošević, 2021. "Bank Solvency Stress Tests with Fire Sales (Thomas Breuer, Martin Summer, Branko Urošević)," Working Papers 235, Oesterreichische Nationalbank (Austrian Central Bank).
    • Handle: RePEc:onb:oenbwp:235
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    References listed on IDEAS

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    More about this item

    Keywords

    Stress Testing; Fire Sales; Deleveraging; Systemic Risk;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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