In his speech, ECB's Vice-President Vítor Constâncio elaborates the need to further enhance the macroprudential function of stress testing.
Keynote address by Vítor Constâncio, Vice-President of the ECB, at the London School of Economics Conference on “Stress Testing and Macroprudential Regulation: a Trans-Atlantic Assessment”, London
The generalised use of system-wide stress testing was boosted by the financial crisis. However, thus far, system-wide stress tests have been focusing on banks and their solvency and have been used for microprudential purposes.
The macroprudential policy function has added a new dimension to stress testing going well beyond the examination of individual bank results.
Enhancements in the macro stress testing framework are underway to integrate more realistic dynamic features in the model-framework, allow for banks’ reactions, add a proper liquidity stress test component, integrate contagion effects as well as a two-way interaction with the real economy.
Furthermore, efforts are being made in the direction of going beyond banks and integrating, to the extent possible, the shadow banking sector in the broader framework.
These steps are necessary to provide the macro dimension to stress testing exercises and make them fit for macroprudential policy use. This entails accounting for macroeconomic impacts along the horizons of stress testing exercises, as well as alerting for the need for pre-emptive action and assessing the impact of macroprudential policy tools.
The objective is very challenging but is being actively pursued: a new framework for stress testing must serve both the micro- and the macroprudential policy functions in a complementary way.
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