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Macro stress tests and crises: what can we learn?

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  • Rodrigo Alfaro
  • Mathias Drehmann

Abstract

Few, if any, of the macro stress tests undertaken before the current crisis uncovered significant vulnerabilities. This article examines the reasons for the poor performance by comparing the outcomes of simple stress tests with actual events for a large sample of historical banking crises. The results highlight that the structural assumptions underlying stress testing models do not match output growth around many crises. Furthermore, unless macro conditions are already weak prior to the eruption of the crisis, the vast majority of stress scenarios based on historical data are not severe enough. Last, stress testing models are not robust, as statistical relationships tend to break down during crises. These insights have important implications for the design and conduct of stress tests in the future.

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File URL: http://www.bis.org/publ/qtrpdf/r_qt0912e.pdf
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Bibliographic Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2009)
Issue (Month): (December)
Pages:

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Handle: RePEc:bis:bisqtr:0912e

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  1. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521634809, December.
  2. Reinhart, Carmen & Rogoff, Kenneth, 2009. "Banking Crises: An Equal Opportunity Menace," CEPR Discussion Papers 7131, C.E.P.R. Discussion Papers.
  3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  4. Gary Gorton, 1986. "Banking panics and business cycles," Working Papers 86-9, Federal Reserve Bank of Philadelphia.
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