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Designing Effective Macroprudential Stress Tests

Progress So Far and the Way Forward

Designing Effective Macroprudential Stress Tests by Dimitri G. Demekas
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Giving stress tests a macroprudential perspective requires (i) incorporating general equilibriumdimensions, so that the outcome of the test depends not only on the size of the shock and thebuffers of individual institutions but also on their behavioral responses and their interactions witheach other and with other economic agents; and (ii) focusing on the resilience of the system as awhole. Progress has been made toward the first goal: several models are now available thatattempt to integrate solvency, liquidity, and other sources of risk and to capture some behavioralresponses and feedback effects. But building models that measure correctly systemic risk and thecontribution of individual institutions to it while, at the same time, relating the results to theestablished regulatory framework has proved more difficult. Looking forward, makingmacroprudential stress tests more effective would entail using a variety of analytical approachesand scenarios, integrating non-bank financial entities, and exploring the use of agent-basedmodels. As well, macroprudential stress tests should not be used in isolation but be treated ascomplements to other tools and-crucially-be combined with microprudential perspectives.
International Monetary Fund; June 2015
34 pages; ISBN 9781513501536
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Title: Designing Effective Macroprudential Stress Tests
Author: Dimitri G. Demekas