Macrofinancial Scenarios for System-wide Stress Tests: Process and Challenges

Jérôme Henry

Stress tests have been conducted by a number of authorities around the world on a regular basis, especially since the late 2000s. The exercises focused on latterly, which will be discussed in this chapter to explore their underlying scenarios, are those carried out system-wide with a view to testing the resilience of a whole banking sector. This wave of stress tests started immediately after the financial crisis emerged, and is still ongoing. Namely, since the 2007–08 subprime and Lehmann episodes, stress tests have been carried out on an almost yearly basis overall, be it in the US, the UK, the EU as a whole, or in some of countries confronted with specific (fiscal or housing) crises (see, for example, FRB, 2014; Bank of England, 2015; ESRB, 2014). These stress tests have all used as a basis a consistent and complete set of macrofinancial assumptions that were specifically designed to stress the banks’ balance sheets, in other words what is commonly called a “scenario”, which we will consider in what follows. These macrofinancial assumptions were meant in general to replicate a crisis situation, and have been closely related to the very motivation of a stress test, ie, assessing

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