Banks that face simultaneous credit and liquidity shocks require stress-testing frameworks that capture interactions across balance-sheet channels, market behavior, and cross-border flows. Research by Hyun Song Shin, Bank for International Settations, highlights how funding liquidity and market liquidity amplify each other, producing non-linear outcomes when asset sales and margin calls coincide. Empirical work by Viral V. Acharya, New York University Stern School of Business, shows that credit deterioration can quickly erode liquidity buffers as funding costs rise and market depth falls. Together, these findings support moving beyond isolated credit-loss or cash-flow tests toward fully integrated approaches that reflect real-world linkages.
Integrated scenario construction and governance
Effective stress tests combine macroeconomic, market-price, and liability-run scenarios with explicit modeling of feedback loops between asset prices and bank funding. Frameworks informed by the Bank for International Settlements and the International Monetary Fund recommend scenario families that include sudden stops in wholesale funding, rating-driven margin calls, and simultaneous sovereign or corporate downgrades. Work by Tobias Adrian, Federal Reserve Bank of New York, and Markus Brunnermeier, Princeton University, argues for endogenous scenarios where banks’ own balance-sheet responses change market conditions. Governance must ensure scenario plausibility, supervisory review, and transparency about assumptions so that outputs are actionable for capital planning and liquidity contingency strategies.
Behavioral channels, networks, and territorial context
Capturing human and cultural responses matters: depositors’ trust, local media narratives, and national resolution regimes alter run dynamics in ways that purely mechanical models miss. Gary Gorton, Yale University, demonstrates historical bank runs driven by information frictions; regulators should therefore embed behavioral frictions into liquidity shocks. Network models of interbank exposures identify contagion pathways that disproportionately affect smaller jurisdictions and frontier markets, a point emphasized in IMF technical guidance. Environmental and territorial factors—such as climate-related asset repricing in exposed regions—can convert localized credit losses into systemic stress by undermining regional collateral values. Consequences of inadequate integrated testing include amplified procyclicality, mispriced regulatory buffers, and cross-border spillovers that complicate resolution. Robust stress-testing therefore requires multidisciplinary input from supervisors, market analysts, behavioral scientists, and local authorities to align capital and liquidity policy with the complex realities of simultaneous credit and liquidity shocks.