Abstract
Supervisory stress testing to date has focused on the resiliency of large banks to withstand the direct effects of a credit shock. Using data from Depository Trust & Clearing Corporation (DTCC), we apply the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) supervisory scenarios to evaluate the default of a bank's largest counterparty. We find that indirect effects of this default, through the bank's other counterparties, are larger than the direct impact on the bank. Further, when taken as a whole, the core banking system has a higher concentration to a single counterparty than does any individual bank holding company. Under the 2015 stress, the banking system's counterparty credit concentration is high and corresponds in diversity to a market with just over three firms. Our results are the first to evaluate the credit derivatives market under stress and also underscore the importance of a macroprudential perspective on stress testing.
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