European bank stress tests are showing some banks as resilient when they are actually fragile, a working paper published by the Austrian National Bank argues.

In Bank solvency stress tests with fire sales, Thomas Breuer, Martin Summer and Branko Uroševic present a new method for calculating the effects of rapid deleveraging by distressed institutions. Fire sales’ effects are rarely considered in banking stress tests, perhaps for fear of further complicating these exercises, the authors note.

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