Measuring Capital at Risk with Financial Contagion: Two‑Sector Model with Banks and Insurers
Interdependent economic shocks, modeled through a two‑sector approach (banks and insurers), impact the financial system by amplifying initial shocks via feedback mechanisms. Stress tests on UK data show improved profit expectations and reduced tail losses post‑COVID‑19, with insurers more vulnerable to credit risks and banks to fire sale losses.