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An integrated macroprudential stress test of bank liquidity and solvency

An integrated macroprudential stress test of bank liquidity and solvency
An integrated macroprudential stress test of bank liquidity and solvency
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.
Bakoush, Mohamed
09d43d33-abd2-4db0-a26a-2f5831ea0a01
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Bakoush, Mohamed
09d43d33-abd2-4db0-a26a-2f5831ea0a01
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e

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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Accepted/In Press date: 1 January 2019

Identifiers

Local EPrints ID: 441693
URI: http://eprints.soton.ac.uk/id/eprint/441693
PURE UUID: edae7131-8a09-4e1e-8381-6a8749353a40
ORCID for Mohamed Bakoush: ORCID iD orcid.org/0000-0001-9624-9828
ORCID for Enrico Gerding: ORCID iD orcid.org/0000-0001-7200-552X
ORCID for Simon Wolfe: ORCID iD orcid.org/0000-0001-9815-9535

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Date deposited: 24 Jun 2020 16:30
Last modified: 25 Jun 2020 00:46

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Contributors

Author: Mohamed Bakoush ORCID iD
Author: Enrico Gerding ORCID iD
Author: Simon Wolfe ORCID iD

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