James Kolari

James Kolari

Finance | Banking

The 2008-2009 financial crisis was a global event. The U.S. felt it heavily, but the world-at-large was impacted just as much. The truth of that painful matter is that regulators around the world are still worried about these failures. For this reason they started evaluating banks to see if they could survive another bad crisis in the future. These so-called “stress tests” are now publicly disclosed for all major banks in the world. James Kolari, Ph.D., and a handful of other leading financial minds, are studying why some banks pass the stress tests and some fail these tests.

Kolari’s co-authors are employed by a well-known Spanish bank named Banco Santander and are actively engaged in regulatory compliance with stress tests in Europe. Kolari used to work with the Federal Reserve Bank of Chicago with an emphasis on regulatory surveillance models of bank condition. This team has a natural inclination to work on the problem of bank stress tests.

It is generally believed that the stress test results are determined by the particular economic and financial shocks imposed on banks. Some critics of stress tests view these shocks as ad hoc and not very informative. In the future a different set of shocks may occur than those that regulators are testing with major consequence to society. The results found by Kolari’s team show that it is the financial condition of the bank that primarily governs their stress test results, not the specific shocks chosen by regulators. By implication, the financial condition of individual banks should be the main focus of regulatory policy and banking practice.

Using a software algorithm known as AdaBoost for their analyses, the team builds multiple models within one model and then uses the strengths of each model to better predict whether a bank will pass or fail its stress tests in the near future. By trying to predict the outcomes of a stress test, bankers and bank regulators have the potential to better prepare for any future bank crisis and ensure the stability of an economy.

Learn more about Kolari: tx.ag/MaysKolari

Published Work

Predicting Stress Tests in European Banks