An integrated macroprudential stress test of bank liquidity and solvency

Bakoush, Mohamed, Gerding, Enrico, Mishra, Tapas and Wolfe, Simon (2022) An integrated macroprudential stress test of bank liquidity and solvency. Journal of Financial Stability, 60, [101012]. (doi:10.1016/j.jfs.2022.101012).

Record type: Article

Abstract

We propose a new measure of systemic financial distress that incorporates idiosyncratic and systemic risks in the financial system network. Using this measure, we develop an integrated stress test of bank liquidity and solvency risks based on the dynamics of financial distress within the banking system network. We apply this stress test framework to the US banking system and identify systemic vulnerability of individual banks as well as the resilience of the system as a whole to an economic shock. The framework helps us identify and monitor systemic interdependencies between banks. The proposed stress testing framework is useful for practical macroprudential monitoring and is informative for policy making.

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Accepted/In Press date: 13 April 2022

e-pub ahead of print date: 20 April 2022

Published date: June 2022

Additional Information: Funding Information: We are grateful to Iftekhar Hasan, the Managing Editor and two anonymous reviewers for constructive comments and suggestions, which have helped to improve this paper. We are also grateful to the participants at the American Economic Association 2019 Annual Meeting, and the Institute for New Economic Thinking Conference for their insightful and constructive comments; and the seminar participants at the Bank of England, the University of Southampton, and Brunel University London for their helpful comments and discussions. This work was supported by the University of Kafrelsheikh [grant number KFSCOM2013]. All errors are solely our own. Funding Information: We are grateful to Iftekhar Hasan, the Managing Editor and two anonymous reviewers for constructive comments and suggestions, which have helped to improve this paper. We are also grateful to the participants at the American Economic Association 2019 Annual Meeting, and the Institute for New Economic Thinking Conference for their insightful and constructive comments; and the seminar participants at the Bank of England, the University of Southampton, and Brunel University London for their helpful comments and discussions. This work was supported by the University of Kafrelsheikh [grant number KFSCOM2013 ]. All errors are solely our own. Copyright © 1969, Elsevier

Keywords: Liquidity, Macroprudential policy, Networks, Solvency, Stress testing, Systemic risk

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