The U.K. financial sector is globally systemic, open, and complex. It has weathered the COVID-19 pandemic fittingly, thanks to the post-GFC reforms, a proactive macroprudential stance, and an effective multipronged response to maintain financial stability. Brexit uncertainties are being handled...

The economy recovered strongly in 2021, following an unprecedented real output contraction in 2020. However, the outlook remains precarious amidst projected future low growth, high unemployment and adverse debt dynamics, and the recovery pace is unlikely to be sustained. Ample buffers allowed...

The article employs panel data to investigate whether stress test results and other characteristics associated with European insurers vulnerabilities affect dividend distributions and share buybacks. We focus on the EU wide insurance stress test conducted in 2018 and 2021 as in this way we can...

This paper presents the pilot top-down climate stress test of the Hungarian banking system over the 2020-2050 horizon. The focus is on a core indicator of financial soundness, the ratio of non-performing loans. Three scenarios are considered with different grades of compliance with the Paris...

Bank compensation in distress is often regarded as special due to the prevalence of high bonus payments. I study European banks over the period 2014 to 2018 to determine how banks adjust compensation during distress in the post-crisis era. I use a novel hand-collected database to analyze...

In the post-WWII (since the 1950s), there have been over 400 banking, currency, and sovereign debt crises, which translates to about 10 crises per annum; furthermore, the combined cost of the last five crises since the late 1990s is in excess of $30 trillion, but when the cost of the COVID-19...

Credit risk modeling remains an important research topic both for financial institutions and the academic community due to its significant contribution to the issue of a bank’s capital adequacy. In this paper we build macro models for the default rates of Greek bank’s loan portfolios....

What is the impact of stress tests on bank stock prices? To answer this question we study the impact of the publication of the EU-wide stress tests in 2014, 2016, 2018, and 2021 on the first (λ) and second (δ) moment of equity returns. First, we study the effect of the disclosure of stress...

This paper deals with both system-wide and banks' internal stress tests. For system-wide stress tests it describes the evolution over time, compares the stress test design in major jurisdictions, and discusses academic research. System-wide stress tests have gained in importance and nowadays...

Systemic risk, in a complex system with several interrelated variables, such as a financial market, is quantifiable from the multivariate probability distribution describing the reciprocal influence between the system's variables. The effect of stress on the system is reflected by the change in...

Climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment. We develop a stress testing procedure...

The aim of this article is to highlight the importance and effectiveness of stress testing as part of microprudential policy. We focus on microprudential stress testing to assess financial stability, the resilience and solvency of one important private bank in Algeria in the face of liquidity...

Hong Kong SAR (HKSAR) is a small and open economy, and a major international financial center with extensive linkages to Mainland China. Over the past two years, Hong Kong SAR's economy and financial sector were adversely impacted by domestic social unrest, US-China tensions, and the global...

Climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment. We develop a stress testing procedure...

Climate change is one of the greatest challenges facing humankind this century. If left unchecked, it is likely to result in more frequent and severe climatic events, with the potential to cause substantial disruption to our economies, businesses and livelihoods in the coming decades. Yet the...

What kind of models do we need to guide us through the next crisis? If past crises are any indication, we need to explore new approaches. During the Great Financial Crisis, the models that existed at the time were of little value because they focused on firm-level interactions and did not...

This paper analyzes a group of 755 firms, with aggregate indebtedness of US$6.2 trillion, to assess the solvency risks and liquidity needs facing the U.S. corporate sector based on projections of net income, availability and cost of funding, and debt servicing flows under different stress test...

In this paper, we consider models of price-mediated contagion in a banking network of common asset holdings. For these models, the literature proposed two alternative classes of liquidation dynamics: threshold dynamics (banks liquidate their investment portfolios only after they have defaulted),...

This paper presents an approach to a macroprudential stress test for the euro area banking system, comprising the 91 largest euro area credit institutions across 19 countries. The approach involves modelling banks’ reactions to changing economic conditions. It also examines the effects of...

We provide evidence consistent with a “credit-line drawdown channel” to explain the large and persistent crash of bank stock prices during the COVID-19 pandemic. Stock prices of banks with large ex-ante exposures to undrawn credit lines and large ex-post gross drawdowns declined more,...

This paper questions the relevance of using only the 5-year maturity CDS spreads to examine the CDS market response to the disclosure of a regulatory stress test results. Since the stress testing exercises are performed on short-term forward-looking stressed scenarios (1 to 3 years), we assume...

We show that central banks face a time inconsistency problem when publishing bank stress test results. Before a stress test, they want to appear tough as the threat of letting banks fail the stress test incentivizes prudent behaviour. After the stress test, they want to act soft by releasing...

The paper´s aim is to contribute to the debate on the impact of stress test on banking system liquidity. Due to the theoretical character of the problem, the used methodology is a set of results from research and theoretical works about how the attempts to increase system solvency could lead...

The study investigates the informational value of the Comprehensive Assessment (CA) 2014 and the Stress Test Exercise (STE) 2016 by leveraging the literature on market reactions around scheduled announcements and by analyzing the trading patterns and volume-return co-movements around the...

This paper studies banks' investment in risk management practices following the Global Financial Crisis and the advent of stress testing. Banks that experienced greater losses during the Crisis exhibit stronger demand for risk management talents. Banks increase their demand for highly skilled...

The article addresses the issue of stress testing based on the probability of bankruptcy and a rating migration matrix. The analysis is conducted on a sample of listed companies in Poland in the years 1998-2016, and the forecasts are made for the years 2016-2018. Particular attention is paid to...

We use an expansive regulatory loan-level data set to analyze how the portfolios of the largest US banks have changed in response to the Dodd-Frank Act Stress Test (DFAST) requirements. We find that the portfolios of the largest banks, which are subject to stress-testing, have become more...