In the work of the Basel Committee there has been a tradition of distinguishing market from credit risk and to treat both categories independently in the calculation of risk capital. In practice positions in a portfolio depend simultaneously on both market and credit risk factors. In this case,...

Stress tests that do not consider systemic risk may be focused only on the initial risk of insolvency due to loan losses and not on the consequent risk of illiquidity that arise from deleveraging. We examine bank failures to find a larger number of banks failing in a larger number of scenarios...