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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 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.
Liquidity, Macroprudential policy, Networks, Solvency, Stress testing, Systemic risk
1572-3089
Bakoush, Mohamed
09d43d33-abd2-4db0-a26a-2f5831ea0a01
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Mishra, Tapas
218ef618-6b3e-471b-a686-15460da145e0
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Bakoush, Mohamed
09d43d33-abd2-4db0-a26a-2f5831ea0a01
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Mishra, Tapas
218ef618-6b3e-471b-a686-15460da145e0
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e

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: 29 April 2022
Keywords: Liquidity, Macroprudential policy, Networks, Solvency, Stress testing, Systemic risk

Identifiers

Local EPrints ID: 456855
URI: http://eprints.soton.ac.uk/id/eprint/456855
ISSN: 1572-3089
PURE UUID: 09a50b97-6ff1-45ef-a8df-0f6e02756302
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 Tapas Mishra: ORCID iD orcid.org/0000-0002-6902-2326
ORCID for Simon Wolfe: ORCID iD orcid.org/0000-0001-9815-9535

Catalogue record

Date deposited: 12 May 2022 16:59
Last modified: 19 May 2022 01:53

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Contributors

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

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