Macro Stress Testing for Indian Banking: VAR Approach

A vast body of literature endorses the fact that the changes in the macroeconomic conditions of an economy do impact banks’ performance, simultaneously or with a lag. It is also possible that the feedback effects of bank instability on real economic activity could amplify the fluctuations especially during recessions. Therefore, in order to judge the resilience of banking to various macroeconomic shocks, macro stress test using Vector Autoregressive (VAR) approach has been adopted. Based on empirical results it is found that macroeconomic variables do have significant impact on banks’ stability.