Financial instability often results from positive feedback loops intrinsic to the operation of the financial system. The challenging task of identifying, modeling, and analyzing the causes and effects of such feedback loops requires a proper systems engineering perspective lacking in the...

Stress testing, which has its roots in risk management, should be adapted to support financial stability monitoring and to incorporate the interconnections and dynamics of the financial system. Since the 2008 financial crisis, bank supervisors have honed their financial stability monitoring...