: going beyond the static assessment of solvency of individual banks, macroprudential stress tests should account for more realistic features, in particular banks ’ behavioural reaction to the stress which could come in the form of deleveraging, straight capital increases or work - out of nonperforming loans. to take that into account, the dynamic balance - sheet is implemented in see also keynote address by v. constancio ( 2015 ), “ the role of stress testing in supervision and macroprudential policy ”, london school of economics conference on stress testing and macroprudential regulation : a trans - atlantic assessment, 29 october : http : / / www. ecb. europa. eu / press / key / date / 2015 / html / sp151029. en. html. bis central bankers ’ speeches our framework by allowing banks to re - optimise their portfolio according to the risk - return optimisation criterion. 11 to account for two - way interactions of banks with the real economy we have developed dynamic stochastic general equilibrium ( dsge ) models which are being calibrated at the individual country level to assess these effects. 12 adequate levels of capital requirements, beyond regulatory minima, should depend on structural and cyclical factors, notably the overall position of a country in the cycle. a general equilibrium framework is thus needed to account for the overall impact of higher capital ratios that can constrain banks ’ capacity to provide credit to the economy while, at the same time, can bring down the cost of credit by reducing banks ’ default probability. the optimal level of capital requirements is thus one that balances the costs linked to more expensive equity funding with the benefits of a lower rate of bank defaults. results from this model - based approach can quantitatively assess the impact on overall gdp indicating that, as the capital ratio increases, household consumption and borrowers ’ welfare first increase and then decrease, thus highlighting the importance of correctly taking into account the starting point – and the position in the cycle – when assessing the effects of a policy measure. we have also assessed banks ’ response to capital shortfalls, using a gvar model, also used to examine the cross - border effects of deleveraging. this empirical work confirms common wisdom that, in response to a negative shock to the leverage, banks tend to shed assets instead of raising capital while keeping the leverage constant. 13 the macro - feedback nexus is however not the only reason why an initial shock to an

and information on assets of distressed debtors. finally, remaining obstacles to third - party investment in distressed loans should be reviewed and where possible removed. on the supervisory side, npl resolution has been designated as one of the top priorities of the single supervisory mechanism. ecb banking supervision has prepared an extensive draft guidance document on npl, expressing supervisory expectations with regard to governance, management, recognition and valuation of npls, which was discussed at length earlier today. the powers of the banking supervisors in the eu are, however, legally limited. for instance, accounting standards, including on the imposition of provisions for non - performing assets, are not set by supervisors. 7 11 / 13 bis central bankers'speeches other elements are likely to be needed for a comprehensive solution. history has proven that asset management companies can swiftly clean up npls from bank balance sheets, and resolve them over a longer period of time. acquisition of assets at their long - term economic value, instead of market value which is depressed by low liquidity and high uncertainty, minimises fire sale losses. for example sweden, korea, germany, ireland, spain and slovenia used these tools to manage banking crises, often with a focus on loans backed by real estate. while overall successful, the degree of success of such entities tends to be linked to strong governance. there is one common feature of this type of amc : state support. until now amcs have rarely been established on a purely commercial basis. governments had to step in to provide capital to banks weakened by the recognition of losses on npls transferred to the amc, and to guarantee the funding of the amc. privately - led solutions would be clearly preferable but have thus far been hardly feasible. is there then a place for such amcs under the current european regulatory framework which puts the burden of managing financial crises on private creditors and investors? there is scope for public sector involvement. it is possible to use government guarantees for funding purposes, as done recently in italy in the context of bank funding and securitisations of npls, in full compliance with the rules and at a market - consistent price. the rules also allow for precautionary recapitalisation of banks by the public sector in cases of significant financial stability concerns, subject to strict conditions laid down in the brrd ( art. 32, 4 ), covering hypothetical losses estimated under an adverse scenario of a stress test. precautionary recapitalisations also have to respect state aid rules