alternatively, results could be published individually or in ranges, such as grouping banks into solvency categories that could be compared with bottom - up, bankby - bank results. there is also a range of model - based results that could be produced and published. a simple exercise would be the equivalent of the bottom - up view using a static balance sheet assumption. at the other end of the spectrum, more comprehensive exercises could inform macroprudential analysis and incorporate amplification effects caused by interbank contagion or feedback loops between the real economy and the financial sector. macroprudential stress testing this leads me to the second point i would like to emphasise today, the advantages of taking a macroprudential perspective with stress testing. the exercises coordinated by the eba, using the constrained bottom - up approach, are microprudential in nature. they aim to assess individual banks ’ resilience to adverse financial and economic circumstances. they inform and help determine bank - specific capital requirements, in particular the components of pillar 2 capital. but it is also possible to carry out a macroprudential exercise that instead focuses on the 2 / 4 bis central bankers'speeches system - wide impact of adverse shocks on the banking sector as a whole. macroprudential stress testing is characterised by a number of key elements. first, it applies a top - down perspective to model the impact of a stress scenario on banks and the wider economy. a top - down approach helps ensure that all banks in the system are treated impartially and consistently. this approach is necessary in macroprudential stress tests to be able to model the aggregate implications of banks ’ dynamic responses to stress. second, macroprudential stress tests operate under the assumption of dynamic balance sheets. this enables the model to account for any amplification effects that banks ’ reactions to the initial shock may entail at the aggregate level. as an example, we estimate that the responses of banks to the adverse scenario in the 2018 stress test would exacerbate the fall in gdp by a further 1. 6 % beyond the initial shock. that deeper economic contraction would itself further deplete banks ’ capital, something that would not be picked up under the static assumptions of the microprudential exercise. 5 third, macroprudential stress testing typically aims to capture a comprehensive view of systemic risks affecting the banking sector and beyond. just as microprudential stress tests can help banks improve their internal risk

. schuler and t. a. peltonen ( 2015 ), “ characterising the financial cycle : a multivariate and time - varying approach ”, ecb working paper series no. 1846. bis central bankers ’ speeches directly considered by central banks with a dual mandate, like the u. s. fed. it is considered indirectly by central banks with a hierarchical mandate, like the one of the ecb. more generally, though, no central bank has objectives explicitly referred to asset prices in its mandate. there are different reasons why monetary policy cannot, and should not, be used to deal with financial instability in asset markets. one relates to the fact that the monetary policy objective may require an expansionary stance when asset markets would require restrictive measures, reflecting different positions in the business and financial cycle. 3 a second argument questions whether monetary policy, through its main policy instrument – the short term interest rates – can effectively target asset market prices. 4 finally, monetary policy affects all sectors simultaneously and is therefore a too blunt or even an ineffective tool to cope with specific imbalances in the financial sector. all these reasons imply that monetary policy needs to be complemented by an additional policy, with a differentiated set of instruments, in order to ensure financial stability. this is the remit of macroprudential policy. indeed, after the crisis, there has been a trend to attribute an explicit goal of financial stability to central banks. in order to fulfil this objective, central banks have to be entrusted with a new set of granular tools of a macroprudential nature that can be applied to the financial system as a whole. macroprudential policy has two main objectives : enhancing the resilience of financial institutions and the whole financial system and, second, smoothening the financial cycle as captured by the fluctuations in credit, leverage and asset prices which may else lead to boom - bust episodes. the instruments available for macroprudential policy include most of the micro - supervision instruments related to capital and liquidity requirements when applied to counter systemic risks related. but they extend also to other categories, like limits to loanto - value ratios in housing credit, counter - cyclical capital buffers, global leverage ratios, or haircuts and margin requirements in securities ’ transactions or clearing activities. macroprudential policy is essential in any economy to complement monetary policy as the business and financial cycles are not synchronised. this is all the more important in a monetary