Bank stress tests should take into account inter-sectoral dependencies, finds a new paper from the Bundesbank.

The research stress tests the credit portfolios of 28 large German banks for a downturn in the automobile industry and finds that although all of the banks in the sample have loans related to the car industry, the proportion is small. However, the research finds that due to correlation effects with related industry sectors the expected loss from default would increase by 70%-80% should