Edited by
Mario Quagliariello

Contents

Part I Fundamentals
1 A framework for assessing financial stability
Maurizio Trapanese (Bank of Italy) 7
1.1 Introduction 7
1.2 Building the framework 9
1.3 The use of macroprudential analysis for assessing financial stability 11
1.4 Looking for instability 12
1.5 Conclusions 16
References 17
2 Macroeconomic stress-testing: definitions and main components
Mario Quagliariello (Bank of Italy) 18
2.1 Introduction 18
2.2 Objectives of stress-testing: the micro and macro perspectives 19
2.3 Stress tests: definitions 22
2.4 The ingredients for macroeconomic stress-testing 25
References 35
3 Macroeconomic stress-testing banks: a survey of methodologies
Mathias Drehmann (Bank for International Settlements) 37
3.1 Introduction 37
3.2 Exposures to risk 38
3.3 The risk measure 48
3.4 The model of the data generating process 50
3.5 Methodological challenges 55
3.6 The new frontier: an integrated approach to macroeconomic
stress-testing 60
References 62
4 Scenario design and calibration
Takashi Isogai (Bank of Japan) 68
4.1 Introduction 68
4.2 Objectivity and plausibility of stress tests 69
4.3 Technical discussion on the plausibility of stress scenarios 74
4.4 Conclusions 77
References 78
5 Risk aggregation and economic capital
Vincenzo Tola (Bank of Italy) 80
5.1 Introduction 80
5.2 Some basic definitions 81
5.3 Related literature 83
5.4 Copulas 84
5.5 Copulas in an economic capital model 87
5.6 Conclusions 96
References 97
6 Data needs for stress-testing
Francesco Cannata (Bank of Italy) and Ulrich Krüger
(Deutsche Bundesbank) 99
6.1 Introduction 99
6.2 Overview of the information needed for stress-testing 100
6.3 Data needs by risk type 103
6.4 A focus on credit risk 106
6.5 A possible tool for organising data 110
References 115
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7 Use of macro stress tests in policy-making
Patrizia Baudino (Financial Stability Board) 117
7.1 Introduction 117
7.2 Use of macro stress tests for policy-making: limitations
and benefits 120
7.3 How macro stress tests have been used for policy-making 124
References 128
Part II Applications 131
8 Stress-testing credit risk: the Italian experience
Sebastiano Laviola, Juri Marcucci and Mario Quagliariello (Bank of Italy) 133
8.1 Introduction 133
8.2 The Italian banking system: some stylised facts 134
8.3 An analytical framework for stress-testing credit risk 135
8.4 Stress test results 143
8.5 Conclusions 147
References 148
9 Stress-testing US banks using economic-value-of-equity
(EVE) models
Mike Carhill (Office of the Comptroller of the Currency) 149
9.1 Introduction 149
9.2 The EVE concept 151
9.3 Future business 153
9.4 Model uncertainty 155
9.5 Credit risk 160
9.6 Conclusions 162
Appendix Variation of deposit sensitivity estimates across banks 162
References 163
10 A framework for integrating different risks: the interaction
between credit and interest rate risk
Steffen Sorensen (Barrie and Hibbert) and Marco Stringa (Bank of England) 165
10.1 Introduction 165
10.2 A framework for integrating interest rate and credit risk 168
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10.3 Building blocks of the stress test 172
10.4 Illustrative simulations 175
10.5 Future challenges to capture integration in macro stress tests 181
10.6 Conclusions 182
References 182
11 Stress-testing linkages between banks in the Netherlands
Iman van Lelyveld, Franka Liedorp and Marc Pröpper (De Nederlandsche Bank) 184
11.1 Introduction 184
11.2 The Dutch financial landscape 185
11.3 Interbank loan market 187
11.4 Payment networks 193
11.5 Conclusions 199
References 201
12 An integrated approach to stress-testing: the Austrian Systemic
Risk Monitor (SRM)
Michael Boss, Gerald Krenn, Claus Puhr and Martin Summer
(Oesterreichische Nationalbank) 202
12.1 Introduction 202
12.2 The Austrian banking system 204
12.3 Theoretical foundations of the SRM 206
12.4 Input data of the SRM 214
12.5 Application of the SRM 217
12.6 Output data of the SRM 221
12.7 Some examples of stress tests with the SRM 224
12.8 Conclusions 235
References 237
13 From macro to micro: the French experience on credit risk
stress-testing
Muriel Tiesset and Clément Martin (Banque de France – French Banking
Commission) 238
13.1 Main features and objectives of the French stress-testing
framework 238
13.2 Stress-testing the French banking sector through
macroeconomic scenarios 241
13.3 Stress-testing corporate credit portfolios through ad hoc
credit shocks: analysing banks’ concentration risk on
business sectors 251
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13.4 Micro surveillance of French banks’ credit portfolio risk
profile and potential micro/macro links 252
13.5 Conclusions 255
Appendix 1 The credit risk migration model 256
Appendix 2 The model of bank profitability 259
References 260
14 Stress-testing in the EU new member states
Adam Głogowski (National Bank of Poland) 261
14.1 Introduction 261
14.2 Credit risk stress-testing 263
14.3 Market risk stress-testing 269
14.4 Liquidity risk stress-testing 271
14.5 Interbank contagion in stress tests 273
14.6 Challenges for the future 274
References 276
15 Cross-border macro stress-testing: progress and future
challenges for the EU
Olli Castrén, John Fell and Nico Valckx (European Central Bank) 278
15.1 Introduction 278
15.2 Accounting for the cross-border dimension in credit risk
stress-testing 279
15.3 European challenges to cross-border stress-testing 287
15.4 Conclusions 294
References 295
16 Stress-testing at the IMF
Marina Moretti, Stéphanie Stolz and Mark Swinburne (International Monetary Fund) 297
16.1 Introduction 297
16.2 Background: overview of the FSAP 299
16.3 Stress-testing in FSAPs 300
16.4 FSAP stress-testing going forward 307
Annex Stress-testing in European FSAPs 310
References 316
Conclusions
Mario Quagliariello (Bank of Italy) 318
Index 322