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Journal Article
Recent Federal Reserve actions include expansion of loan program, release of banks' \"stress test\" results
The Fed recently broadened a program intended to stimulate bank lending and released the results of recent tests of the financial conditions of the 19 largest U.S. bank holding companies.
Journal Article
Fed chair Bernanke on the lessons of SCAP \"Stress tests\"
At the Atlanta Fed's Financial Markets Conference, Federal Reserve Board Chairman Ben Bernanke detailed how the federal banking supervisory agencies assessed the health of the nation's 19 largest banking companies.
Working Paper
The financial stress index: identification of systemic risk conditions
This paper develops a financial stress index for the United States, the Cleveland Financial Stress Index (CFSI), which provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The index is based on daily public-market data collected from four sectors of the fi nancial markets?the credit, foreign exchange, equity, and interbank markets. A dynamic weighting method is employed to capture changes in the relative importance of these four sectors as they occur. In addition, the design of the index allows the origin of the stress to be identified. We ...
Journal Article
When gauging bank capital adequacy, simplicity beats complexity
It is unclear whether ratio complexity enhances the ability to identify failure and is better than a simpler ratio. But a simpler ratio offers the benefits of greater transparency and accountability.
Journal Article
Assessing supervisory scenarios for interest rate risk
A new proposal by the Basel Committee on Banking Supervision for setting the amount of capital banks must hold against potential losses from interest rate risk uses only a few, very stylized scenarios. Analysis shows the proposed scenarios are extremely unlikely to occur. While they may be appropriate for setting bank capital guidelines, they are much less relevant for everyday risk management. Instead, using a modeling framework with a plausible range of interest rate scenarios would be more relevant to help banks manage their interest rate risk.
Journal Article
Stress testing and bank capital supervision
Stress testing was a potent tool in the supervision of bank capital during the financial crisis. Stress tests can enhance supervision of bank capital by providing a more forward-looking and flexible process for assessing risks that might not be fully captured by risk-based capital standards. The level and quality of capital among large banking organizations has increased notably since the introduction of stress tests during the financial crisis.
Journal Article
Stress tests: useful complements to financial risk models
Many supervisory agencies have begun using stress-testing techniques to assess the capital adequacy of individual firms and even national financial systems. In this Economic Letter, I define stress testing, describe its possible applications, highlight certain techniques developed to conduct this testing, and survey its recent use by supervisory agencies.
Working Paper
Risk aversion, risk premia, and the labor margin with generalized recursive preferences
A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to absorb shocks along either or both margins greatly alters the household?s attitudes toward risk, as shown by Swanson (2012). The present paper extends that work to the case of generalized recursive preferences, as in Epstein and Zin (1989) and Weil (1989), which are increasingly being used to bring macroeconomic models into closer agreement with basic asset pricing facts. Measures of risk aversion commonly used in the literature show no ...
Working Paper
Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis
This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as the insurance cost to protect against distressed losses in a banking system, is a risk-neutral concept of capital based on publicly available information that can be appropriately aggregated across different subsets. An application of our methodology to a portfolio of twenty-two major banks in Asia ...
Working Paper
A coherent framework for stress-testing
In recent months and years both practitioners and regulators have embraced the ideal of supplementing VaR estimates with "stress-testing". Risk managers are beginning to place an emphasis and expend resources on developing more and better stress-tests. In the present paper, we hold the standard approach to stress-testing up to a critical light. The current practice is to stress-test outside the basic risk model. Such an approach yields two sets of forecasts -- one from the stress-tests and one from the basic model. The stress scenarios, conducted outside the model, are never explicitly ...