Macrofinancial stress testing: Incorporating systemic risk perspectives into a stress testing framework

A Framework for Macroprudential Bank Solvency Stress Testing: Application to S-25 and Other G-20 Country FSAPs

The IMF Caribbean Regional Technical Assistance Centre (CARTAC) conducted a technical assistance mission to Barbados from July 31 to August 11, 2023. The mission aimed to strengthen the stress testing framework of the Central Bank of Barbados (CBB) and the Barbados Financial Services Commission (FSC) by enhancing their solvency stress testing (ST) capabilities for banks and credit unions. During the mission, the team worked closely with authorities to develop two customized stress testing tools, allowing for multi-factor and multi-period solvency assessments under various macroeconomic scenarios. These tools integrate explicit macroeconomic projections and newly developed credit risk satellite models, enabling a more sophisticated approach to evaluating key financial stability indicators, such as non-performing loans (NPLs), capital adequacy ratios, and profitability metrics. An illustrative stress test was conducted using recent financial data to demonstrate the tool’s application. The mission also focused on capacity building, providing hands-on training to technical staff at CBB and FSC to ensure the effective use and long-term sustainability of the stress testing framework. Discussions emphasized the importance of regular stress testing exercises to monitor systemic risks and enhance financial sector resilience. The mission recommended that CBB and FSC conduct semi-annual stress testing exercises, with results incorporated into the Financial Stability Report (FSR).

Liquidity at Risk: Joint Stress Testing of Solvency and Liquidity

Liquidity at Risk: Joint Stress Testing of Solvency and Liquidity

Liquidity at risk: Joint stress testing of solvency and liquidity

Climate change and geopolitical instability have emerged as critical systemic threats to global financial stability, compelling regulators and financial institutions to reassess the adequacy of traditional stress testing and scenario analysis frameworks. While such tools have been foundational in post-crisis prudential regulation, their adaptation to climate-related and geopolitical risks remains uneven, with significant methodological, data, and governance challenges. This review examines the evolution of stress testing from credit and market risk applications to its integration with environmental, social, and geopolitical risk factors. Drawing upon frameworks developed by the Basel Committee on Banking Supervision, the Network for Greening the Financial System (NGFS), the International Monetary Fund (IMF), and national regulators, the paper evaluates whether current regulatory models sufficiently capture the complexity, nonlinearity, and long-horizon impacts of climate and geopolitical shocks. The analysis highlights methodological innovations, including macro-financial linkages, cross-border contagion modeling, and tail-risk scenario design, while identifying persistent gaps in scenario plausibility, temporal scope, and integration into supervisory decision-making. Case studies from the European Central Bank, Bank of England, and stress testing exercises in emerging markets illustrate both promising practices and structural deficiencies. The review concludes with policy recommendations to enhance regulatory readiness through harmonized scenario design, improved data granularity, forward-looking risk metrics, and the embedding of climate-geopolitical risk analysis into macroprudential policy.

We present MicroGrad, a centralized automated framework that is able to efficiently analyze the capabilities, limits and sensitivities of complex modern processors in the face of constantly evolving application domains. MicroGrad uses Microprobe, a flexible code generation framework as its back-end and a Gradient Descent based tuning mechanism to efficiently enable the evolution of the test cases to suit tasks such as Workload Cloning and Stress Testing. MicroGrad can interface with a variety of execution infrastructure such as performance/power simulators as well as native hardware. Further, the modular “abstract workload model” approach to building MicroGrad allows it to be easily extended for further use - enabling more novel usecases, diverse platforms or robust tuning algorithms. In this paper, we evaluate MicroGrad over different use cases and architectures and showcase that MicroGrad can achieve greater than 95% accuracy across different tasks within few tuning epochs and low resource requirements. We also observe that MicroGrad's accuracy is 25-30% higher than competing techniques. At the same time, MicroGrad is able to reach tuning goals 4-5x faster compared to alternate mechanisms. Overall, MicroGrad's fast, resource efficient and accurate test case generation capability allows it to perform rapid evaluation of complex processors.

Stress Testing Made Easy: No More US Banks Stumbling and Facing Public Embarrassment Due to the Federal Reserve’s Qualitative Objection

Since the global financial crisis, banking regulators and academics have extended the traditional, narrow definition of to encompass concepts such as interconnectedness and shadow banking. But, at the time of writing, a definition of systemic risk that covers all of the factors that precipitated the global financial crisis is still emerging. This paper first describes the debate around the emerging definition(s) of systemic risk and discusses some of the initiatives to address systemic risk by international regulators. These initiatives include microprudential regulations, such as increasing capital for systemically important banks, and macroprudential initiatives, such as the creation of the European Systemic Risk Board. Recognizing that systemic risks arise not only from credit and market risk factors, this paper views systemic risk through the lens of operational risk, arguing that key risk factors, especially people and process risks, were pervasive across the global financial industry prior to the global financial crisis and, consequently, operational risk must be considered as a contributor to, and in some instances a trigger for, systemic risk. The paper goes on to describe the microprudential approach to operational risk within the Basel II regulations and identifies and describes operational risks that were present prior to the global financial crisis. The paper concludes that there is indeed a systemic dimension to operational risk that should be recognized and addressed by banking regulators.Finally, the paper makes some suggestions as to how the management of systemic operational risks may be addressed by banks and regulators.

The stress tests were a major innovation growing out of the Global Financial Crisis (GFC). Their objective is to assure that banks have enough capital to allow them to continue to support the economy by making loans to households and businesses even after a severe adverse shock has hit the economy—in marked contrast to the experience of the GFC when sharp restrictions on credit availability through banks and markets made a bad economic situation much worse. In my talk, I will (a) take a deeper dive into the causes and consequences of procyclical risk‐based bank capital and the role the Financial Policy Committee at the Bank of England (FPC) envisions for the countercyclical capital buffer rate (CCyB), informed by stress tests, in countering this tendency, (b) discuss how the FPC has used the CCyB and stress tests in practice, and (c) end with some challenges for the research agenda that would help the FPC be even more efficient and effective.

The thesis is composed of three main chapters each with an independent objective. The first inspects the main funding risk drivers employing a multivariate copula estimation. The second looks at the systemic liquidity risk asking whether macroeconomic fluctuations can trigger and create simultaneous liquidity shortages in banks’ funding position using agent based model(ABM). The third examines the funding liquidity risk’s procyclical behaviour to macroeconomic changes using a feedback mechanism. The findings of the three chapters, are as follow: Chapter 2, detects and quantifies the main funding liquidity risk drivers and shows that commercial banks’ Net Stable Funding Ratio (NSFR) substantially decreases when macroeconomic adverse conditions are applied. In Chapter 3 the results suggest that banks face simultaneous liquidity shortages when the economy’s agents operate under economic recession. Chapter 4 indicates that funding risk is pro cyclical to the macroeconomic fluctuations while large banks’ responses assist on withstanding substantial liquidity shortages when macroeconomic shocks are applied. This study contributes to the literature in three folds: 1) Introduces a new stress test scope by assessing funding liquidity risk and its interrelations with the macroeconomic environment. 2) Provides evidence on prudential policies by incorporating systemic liquidity risk in macro prudential stress test framework. 3) Measures funding liquidity risk pro-cyclical, by developing a second round effects mechanism.

Decomposing the Smile: Systematic Credit Risk in Mortgage Portfolios

A former high-ranking Russian Ministry of Finance official examines the consequences of financial support extended to regions by the Russian Federation government during the global financial crisis in 2008-2010, for the purpose of exploring its potential impact on the regions' financial health in 2011-2012. The paper is structured around an analysis of the three major dimensions of that support: (1) legal and administrative actions undertaken at the federal level to reduce financial pressure on the regions; (2) increased issuance of intergovernmental fiscal grants in 2009; and (3) loans granted to the regions from the federal budget. The author argues that the financial crisis has provided a "stress test" that is useful in assessing the efficiency and flexibility of the Russian system of fiscal federalism.

Bank Stress Tests: An Active Treatment or a Placebo?

Correlation between the 2014 EU-wide stress tests and the market-based measures of systemic risk