Chapter 28. Introduction to the Macro-Financial Approach to Stress Testing

Abstract

During the global financial crisis, the world witnessed the near collapse of major financial institutions that many had believed to be impervious to the sort of panic that brought the global financial system to its knees and led to a worldwide recession. A key lesson from these events is that a purely micro-prudential approach to financial regulation and supervision, focused on the conditions of individual financial institutions and markets, could fail to detect important systemic or cross-cutting risks (Bernanke, 2011). Since then, there has been a generalized push globally to make the financial sector as a whole more robust by taking a broader macro-financial approach to oversight. The key feature of such an approach is to recognize that financial stability depends not only on the safety and soundness of individual financial institutions but also on how they interact with each other and with the real economy.

Author: Ms. Li L Ong