Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264827 
Year of Publication: 
2021
Series/Report no.: 
Working Paper No. 235
Publisher: 
Oesterreichische Nationalbank (OeNB), Vienna
Abstract: 
We present a simple and operational yet rigorous framework that combines current methods of bank solvency stress tests with a description of fire sales. We demonstrate the applicability of our framework to the EBA stress testing exercise. Fire sales are described by an equilibrium model which balances leverage improvements and drops in security prices. The differences in bank losses caused by fire sales are significant and go beyond the trivial fact that with deleveraging we will get bigger losses. It is shown that ignoring potential deleveraging effects can show institutions as resilient which are in fact fragile and thus create a false sense of resilience.
Subjects: 
Stress Testing
Fire Sales
Deleveraging
Systemic Risk
JEL: 
C18
C44
C60
G01
G32
M48
Document Type: 
Working Paper

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