Friday, 29 March 2019: 3:20 PM
Contrary to the common approach of stress-testing under which banks are evaluated to determine whether they are distressed, this empirical study chooses to move from the micro stress test approach to a wider new macro stress test category. By being able to stress test the entire economy of the Eurozone, this will permit big banks to fail and, at the same time, will make room for new banking players to enter the sector, promoting the essence of healthy destruction. The analysis performs a battery of stress tests, by implementing vector autoregression (VAR), Cornish-Fisher VAR, Monte Carlo VAR, Expected Shortfall, Cornish-Fisher Expected Shortfall, Monte Carlo Expected Shortfall. At the same time, it explicitly considers the new regulatory approach of International Financial Reporting Standard (IFRS)9 to incorporate extreme values from forecasted series in our distributions. With Data provided by Thomson Reuters Datastream the analysis also performs two versions of stress tests; one including the (TARGET)2 and one without it. The results document that future stress tests should include TARGET2 values in order to capture a better picture of the stressed economy. The findings from these stress tests clearly illustrate that although there has been a trough after the distress call of 2008, this trough ended. These are results derived without including the TARGET2 transfers. By including the TARGET2 transfers we receive a different picture that possibly acts as a protective mechanism against any future crisis. Caution is still advised possibly due to some lingering imbalances within the Eurozone. Overall, the TARGET2 system assists by mitigating the impact of the next financial crisis on the Eurozone. However, the imbalances might not be enough to keep the mechanism from preventing the next crisis from occurring. As a result, fixing these imbalances, while keeping the mechanism operating at full capacity, is expected to reduce the effects of another crisis in the Eurozone.