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A New Macro Stress Testing Approach for Financial Realignment in the Eurozone

Apergis, Emmanuel, Apergis, Iraklis, Apergis, Nicholas (2019) A New Macro Stress Testing Approach for Financial Realignment in the Eurozone. Journal of International Financial Markets, Institutions and Money, . ISSN 1042-4431. (doi:10.1016/j.intfin.2019.02.002) (KAR id:73488)

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Official URL:
https://doi.org/10.1016/j.intfin.2019.02.002

Abstract

Contrary to the common approach of stress-testing under which banks are evaluatedwhether they are distressed, this empirical study chooses to move from the micro stresstest approach to a wider new macro stress test category. By being able to stress testingthe entire economy of the Eurozone, it will permit big banks to fail and, at the same time,will open room for new banking players to enter the sector, promoting the essence of ahealthy destruction. The analysis performs a battery of stress tests, by implementingVaR, Cornish-Fisher VaR, Monte Carlo VaR, Expected Shortfall, Cornish-Fisher ExpectedShortfall, and Monte Carlo Expected Shortfall. At the same time, it explicitly considersthe new regulatory approach of IFRS9 to incorporate extreme values from forecasted seriesin the distributions. The analysis also performs two versions of stress tests, one includingTARGET2 and one without it. The results document that future stress tests should includeTARGET2 values in order to capture a better picture of the stressed economy. The findingsfrom these stress tests clearly illustrate that although there has been a trough after the distress call of 2008, this trough ended. These are results derived without including theTARGET2 transfers. By including the TARGET2 transfers we receive a different picture thatpossibly acts as a protective mechanism against any future crisis. Caution is still advised,possibly due to some lingering imbalances within the Eurozone

Item Type: Article
DOI/Identification number: 10.1016/j.intfin.2019.02.002
Uncontrolled keywords: Macroprudential, policyFinancial, stabilityMacro stress, testSystemic, riskEuropean, Banking Union
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: E. Apergis
Date Deposited: 15 Apr 2019 11:09 UTC
Last Modified: 06 Oct 2021 14:31 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/73488 (The current URI for this page, for reference purposes)
Apergis, Iraklis: https://orcid.org/0000-0002-7459-6439
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