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Research Spotlight: Tom Sager Develops Stress Tests for Banks

23 September 2014—Thalis is a competitive European Union (EU) grant won by a team that includes Professor Tom Sager of the SDS and IROM departments. Other team members include Greek academics, central bank and foreign experts. The EU funds the grant through the government of Greece.

Named for the ancient Greek philosopher Thales, the apocryphal creator of the first financial derivative, the €600,000 grant is a multi-year award to develop stress tests for European banks and to develop early warning systems for financial distress. The core program of the project is econometric analysis of financial time series to (1) ascertain the sensitivity of bank solvency indicators to perturbations in economic conditions and (2) identify leading indicators of deterioration in financial conditions in time for effective central prophylaxis. Achievement of (1) enables the identification of specific banks that would be most susceptible to destabilization in time of financial stress so that risk could be reduced. Goal (2) contributes to the management of systemic financial risk like that of the crisis that began in 2008.

A desideratum for the project is to base the analysis on publicly available data in order to open policy debate to independent scrutiny. The project funds doctoral students, on site collaboration, and conference presentations, in addition to supplemental investigator stipends.

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