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Assessing financial stability: the Capital and Loss Assessment under Stress Scenarios (CLASS) model
The CLASS model is a top-down capital stress testing framework that uses public data, simple econometric models, and auxiliary assumptions to project the effect of macroeconomic scenarios on U.S. banking firms. Through the lens of the model, we find that the total banking system capital shortfall under stressful macroeconomic conditions began to rise four years before the financial crisis, peaking in the fourth quarter of 2008. The capital gap has since fallen sharply, and is now significantly below pre-crisis levels. In the cross section, banking firms estimated to be most sensitive to macroeconomic conditions also have higher capital ratios, consistent with a “precautionary” view of bank capital, though this behavior is evident only since the crisis. We interpret our results as evidence that the resiliency of the U.S. banking system has improved since the financial crisis, and also as an illustration of the value of stress testing as a macroprudential policy tool.
Cite this item
Beverly Hirtle & Anna Kovner & James Vickery & Meru Bhanot, Assessing financial stability: the Capital and Loss Assessment under Stress Scenarios (CLASS) model, Federal Reserve Bank of New York, Staff Reports 663, 01 Feb 2014, revised 01 Jul 2015.
Note: Previous title: “The Capital and Loss Assessment under Stress Scenarios (CLASS) Model”
- G01 - Financial Economics - - General - - - Financial Crises
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Keywords: capital; stress testing; financial stability
This item with handle RePEc:fip:fednsr:663
is also listed on EconPapers
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