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 sys...

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Bibliographic Details
Published in:Journal of financial stability 2022-06, Vol.60, p.101012, Article 101012
Main Authors: Bakoush, Mohamed, Gerding, Enrico, Mishra, Tapas, Wolfe, Simon
Format: Article
Language:English
Subjects:
Liquidity
Macroprudential policy
Networks
Solvency
Stress testing
Systemic risk
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Summary: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.
ISSN:1572-3089
1878-0962
DOI:10.1016/j.jfs.2022.101012