Stress tests have been increasingly used in recent years by regulators to foster confidence in the banking sector by not only increasing its resilience via mandatory capital increases but also by enhancing transparency to allow investors to better discriminate between banks. In this study, using...

We investigate the consequences of overleveraging and the potential for destabilizing effects from financial- and real-sector interactions. In a theoretical framework, we model overleveraging and indicate how a highly leveraged banking system can lead to unstable dynamics and downward spirals....