Stressed but not helpless: Strategic behavior of banks under adverse market conditions

Arbeitspapier

We model bank management actions in severe stress test conditions using a game-theoretical framework. Banks update their balance sheets to strategically maximize risk-adjusted returns to shareholders given three regulatory constraints and feedback effects related to fire sales, interactions of loan supply and demand, and deteriorating funding conditions. The framework allows us to study the role of strategic behaviors in amplifying or mitigating adverse macrofinancial shocks in a banking system and the role of macroprudential policies in the mitigation of systemic risk. In a macro-consistent stress testing application, we show that a trade-off can arise between banking stability (solvency) and macroeconomic stability (lending) and test whether the release of a countercyclical capital buffer can reduce systemic risk.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2021-35

Classification and Topics

• Classification: Wirtschaft ; Computational Techniques; Simulation Modeling ; Noncooperative Games ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: Central bank research ; Economic models ; Financial institutions ; Financial stability ; Financial system regulation and policies

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Halaj, Grzegorz ; Priazhkina, Sofia
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2021

Further information

• DOI: doi:10.34989/swp-2021-35
• Handle: http://hdl.handle.net/10419/247415
• Last update: 10.03.2025, 11:46 AM CET