A Macroprudential Stress Testing Framework

We present a macroprudential stress testing framework. While traditional stress testing assesses the level of banks’ capital adequacy relative to regulatory requirements through a hypothetical crisis, macroprudential stress testing assesses macroeconomic consequences of the impact of banks’ adjustments to capital requirements. The outcome of such testing depends on the capital requirements and on banks’ capital targets. The primary focus is not on whether or not banks “pass” the test, but on how macroprudential policy tools can prevent a deterioration of macroeconomic developments. Such analyses will be included in Norges Bank’s decision basis for the countercyclical capital buffer. This framework was used to conduct the stress test in Financial Stability Report 2018. ∗Views and conclusions expressed in this publication are those of the authors and should not be taken to represent the views of Norges Bank. †We are grateful to Ragna Alstadheim, Elif Saxegaard-Arbatli, Per Atle Aronsen, Henrik Borchgrevink, Torbjørn Hægeland and Ylva Søvik for useful comments and input. Norman R. Spencer did an excellent job translating our text from Norwegian into English. Any errors or omissions are exclusively the responsibility of the authors. Please direct questions to tord.krogh@norges-bank.no or karsten.gerdrup@norges-bank.no.