From stress testing to systemic stress testing: The importance of macroprudential regulation
Autor: | Irena Vodenska, Eliza Olivia Lungu, Yoshi Fujiwara, Hiroshi Iyetomi, Hideaki Aoyama, Alexander P. Becker |
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Rok vydání: | 2021 |
Předmět: |
040101 forestry
050208 finance Leverage (finance) Applied economics 05 social sciences Closeness Asset allocation 04 agricultural and veterinary sciences Monetary economics Tier 1 capital Basel III Macroprudential regulation 0502 economics and business Systemic risk 0401 agriculture forestry and fisheries Business General Economics Econometrics and Finance Finance |
Zdroj: | Journal of Financial Stability. 52:100803 |
ISSN: | 1572-3089 |
DOI: | 10.1016/j.jfs.2020.100803 |
Popis: | Stability of the banking system and macroprudential regulation are essential for healthy economic growth. In this paper we study the European bank network and its vulnerability to stressing different bank assets. The importance of macroprudential policy is emphasized by the inherent vulnerability of the financial system, high level of leverage, interconnectivity of system's entities, similar risk exposure of financial institutions, and susceptibility for systemic crisis propagation through the system. Current stress tests conducted by the European Banking Authority do not take in consideration the connectivity of the banks and the potential of one bank vulnerability spilling over to the rest of the system. We create a bipartite network with bank nodes on one hand and asset nodes on the other with weighted links between the two layers based on the level of different countries’ sovereign debt holdings by each bank. We propose a model for systemic risk propagation based on common bank exposures to specific asset classes. We introduce the similarity in asset distribution among the banks as a measure of bank closeness. We link the closeness of asset distributions to the likelihood that banks will experience a similar level and type of distress in a given adverse scenario. We analyze the dynamics of tier 1 capital ratio after stressing the bank network and find that while the system is able to withstand shocks for a wide range of parameters, we identify a critical threshold for both asset risk and bank response to a shock beyond which the system transitions from stable to unstable. |
Databáze: | OpenAIRE |
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