An integrated macroprudential stress test of bank liquidity and solvency

Bakoush, Mohamed, Gerding, Enrico and Wolfe, Simon (2019) An integrated macroprudential stress test of bank liquidity and solvency. In American Economic Association 2019 Annual Meeting. Atlanta, GA, USA. (In Press)

Record type: Conference or Workshop Item (Paper)

Abstract

We develop a macroprudential stress test to assess the resilience of banking systems. The proposed approach integrates liquidity risk and solvency risk and provides a convenient method to estimate the change in both of them based on the evolution of financial distress within the banking system. We estimate this evolution of financial distress using a new measure of systemic distress that incorporates microprudential as well as macroprudential risks in the banking system network. The proposed stress test provides output metrics that capture idiosyncratic as well as systemic economic risks at the level of an individual bank and the banking system as a whole. The empirical application of the stress test framework to the U.S. banking system shows how it can be effectively used to identify the systemic vulnerability of individual banks and the resilience of the system as a whole to economic risks. It also shows how the proposed approach can be effective for monitoring and assessing systemic interdependencies among banks.

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