Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/247415 
Year of Publication: 
2021
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2021-35
Publisher: 
Bank of Canada, Ottawa
Abstract: 
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.
Subjects: 
Central bank research
Economic models
Financial institutions
Financial stability
Financial system regulation and policies
JEL: 
C63
C72
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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