System-wide stress tests reveal hidden financial contagion risks
A new Banca d'Italia Occasional Paper surveys methodologies and empirical evidence on system-wide stress testing. The study highlights how interconnections between banks and non-bank financial intermediaries amplify systemic risk.
Mapping contagion across the financial web
Published by Banca d'Italia in July 2026, Occasional Paper No. 1048 surveys the rapidly evolving literature on system-wide stress-testing models.
Authored by Valentina Michelangeli and twelve co-researchers, the study examines how shocks propagate across financial institutions, focusing heavily on interconnections between banks and non-bank financial intermediaries like investment funds and insurers.
The authors review historical crises, including the 2008 Lehman collapse, the March 2020 market turmoil, the 2022 UK LDI crisis, and the 2023 banking failures, to illustrate endogenous amplification mechanisms such as asset fire sales, margin calls, and sudden funding runs across global markets.
Beyond traditional balance sheet silos
The paper classifies stress-testing tools into structural network models, agent-based simulations, and surveillance indicators.
It details quantitative frameworks like the ECB's Interconnected System-wide stress test Analytics model and the Bank of England's Exploratory Scenario Exercise.
While acknowledging major modeling advances since the global financial crisis, the authors stress that severe data gaps remain regarding cross-border linkages, intra-group exposures, and complex behavioural dynamics during systemic events.
Models map panic, buffers absorb it
The survey delivers a timely synthesis of systemic risk tools, yet underscores how difficult it is to model human panic.
Policymakers gain a clear catalogue of contagion channels, but models remain vulnerable to unexpected behavioral shifts.
Ultimately, robust capital buffers matter far more than complex simulations.