Using handpicked equations in the design of satellite models used for stress-testing risks creating an overly optimistic view of banks' capital positions, according to a working paper published by the European Central Bank (ECB).

In A false sense of security in applying handpicked equations for stress test purposes, Marco Gross and Javier Población argue in favour of using Bayesian model averaging in the design of the models instead.

They seek to illustrate this by presenting a set of credit