Stress Testing of Banks’ Profit and Capital Adequacy

Abstract

A model system for stress testing financial stability is being developed at Norges Bank. In this article, we present two of the models in this system: a macroeconomic model and a bank model. The macro model simulates alternative scenarios for the Norwegian economy. The bank model is used to analyse developments in banks’ profit and capital adequacy. We illustrate important properties of these models by examining a stress scenario for the Norwegian economy involving major shocks.