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Stress-testing macro stress testing: does it live up to expectations?

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  • Claudio Borio
  • Mathias Drehmann
  • Kostas Tsatsaronis

Abstract

We critically review the state of the art in macro stress testing, assessing its strengths and weaknesses. We argue that, given current technology, macro stress tests are ill-suited as early warning devices, ie as tools for identifying vulnerabilities during seemingly tranquil times and for triggering remedial action. By contrast, as long as properly designed, stress tests can be quite effective as crisis management and resolution tools. We also see additional side benefits, stemming largely from the way such tests can discipline thinking about financial stability. We suggest possible ways to improve their performance.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 369.

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Length: 28 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:bis:biswps:369

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Keywords: stress tests; financial instability; macroprudential;

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References

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Cited by:
  1. Akio Hattori & Kentaro Kikuchi & Fuminori Niwa & Yoshihiko Uchida, 2014. "A Survey of Systemic Risk Measures: Methodology and Application to the Japanese Market," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 14-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Li Lian Ong & Ceyla Pazarbasioglu, 2014. "Credibility and Crisis Stress Testing," International Journal of Financial Studies, MDPI, Open Access Journal, MDPI, Open Access Journal, vol. 2(1), pages 15-81, February.
  3. Rodolfo Maino & Kalin Tintchev, 2012. "From Stress to Costress," IMF Working Papers, International Monetary Fund 12/53, International Monetary Fund.
  4. Zlatuse Komarkova & Marcela Gronychova, 2012. "Models for Stress Testing in the Insurance Sector," Research and Policy Notes, Czech National Bank, Research Department 2012/02, Czech National Bank, Research Department.
  5. Adam Gersl & Petr Jakubik & Tomas Konecny & Jakub Seidler, 2012. "Dynamic Stress Testing: The Framework for Testing Banking Sector Resilience Used by the Czech National Bank," Working Papers, Czech National Bank, Research Department 2012/11, Czech National Bank, Research Department.
  6. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2014. "Bank regulation and international financial stability: A case against the 2006 Basel framework for controlling tail risk in trading books," Journal of International Money and Finance, Elsevier, Elsevier, vol. 43(C), pages 107-130.
  7. Andreas A. Jobst & Li L. Ong & Christian Schmieder, 2013. "A Framework for Macroprudential Bank Solvency Stress Testing," IMF Working Papers, International Monetary Fund 13/68, International Monetary Fund.

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