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Summary "The identification and assessment of systemic risks is a core function of macro-prudential supervision. There are four broad approaches for analytical models and tools that can support this function. The first three each aim to detect early one of the three main forms of systemic risk, namely the endogenous build-up and unravelling of widespread imbalances, exogenous aggregate shocks and contagion. First, early-warning models and indicators use information in current data in order to signal the presence of emerging imbalances and risks without adding exogenous shocks that are not priced in by the market. Second, macro-stress-testing models are used to assess the resilience of the financial system against extreme but plausible scenarios of widespread exogenous shocks, irrespective of whether current market data give a particular weight to them. Third, contagion and spillover models assess the transmission of instability among financial intermediaries and among financial markets to the extent that the sources are not common. Financial stability indicators, the fourth approach, display the current state of systemic instability in order to, for example, identify the presence of crises. The specific tools underpinning these approaches are broadly available, although further research efforts are also necessary."

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