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Macro Stress Testing at the Bank of Japan

October 8, 2014
Tomiyuki Kitamura*1
Satoko Kojima*2
Koji Nakamura*3
Kojiro Takahashi*4
Ikuo Takei*5
Financial System and Bank Examination Department
Bank of Japan

Abstract

Since the global financial crisis, macro stress testing has attracted much attention in many countries as a method to evaluate potential risks of financial system. The Bank of Japan has conducted macro stress testing with various scenarios reflecting financial and economic conditions at each point in time, and published the results in the semi-annual Financial System Report. This paper explains the framework of macro stress testing reported in the Financial System Report. The framework has been improved over time to ensure it appropriately analyzes risk factors in Japan's financial system. Current notable features of the Bank's macro stress testing are as follows. First, it includes a mechanism reflecting the feedback loop between the financial and economic sectors by using the FMM, a medium-sized structural macro model comprising two sectors: financial and macroeconomic. Second, it can analyze not only aggregate figures such as capital adequacy ratios and net interest income, but also those for individual financial institutions.

JEL Classifications
E44, G21

Keywords
stress testing; macroprudential policy

   We received generous support from Etsuko Kimura and Minako Noutomi. The authors would like to thank the staff of the Bank of Japan for their helpful comments. Any errors or omissions are the responsibility of the authors. The views expressed here are those of the authors and should not be ascribed to the Bank of Japan or its Financial System and Bank Examination Department.

  • *1Financial System and Bank Examination Department; currently at the Bank of England
    E-mail : Tomiyuki.Kitamura@bankofengland.co.uk
  • *2Financial System and Bank Examination Department
    E-mail : satoko.kojima@boj.or.jp
  • *3Financial System and Bank Examination Department
    E-mail : kouji.nakamura@boj.or.jp
  • *4Financial System and Bank Examination Department
    E-mail : koujirou.takahashi@boj.or.jp
  • *5Financial System and Bank Examination Department
    E-mail : ikuo.takei@boj.or.jp

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