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Can macro variables used in stress testing forecast the performance of banks?

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  • Luca Guerrieri
  • Michelle Welch

Abstract

When stress tests for the banking sector use a macroeconomic scenario, an unstated premise is that macro variables should be useful factors in forecasting the performance of banks. We assess whether variables such as the ones included in stress tests for U.S. bank holding companies help improve out of sample forecasts of chargeoffs on loans, revenues, and capital measures, relative to forecasting models that exclude a role for macro factors. Using only public data on bank performance, we find the macro variables helpful, but not for all measures. Moreover, even our best-performing models imply bands of uncertainty around the forecasts so large as to make it challenging to distinguish the implications of alternative macro scenarios.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-49.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-49

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  1. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
  2. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
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