Traditional stress-testing models focus exclusively on solvency risk, and estimate the overall risk to the financial system by simply aggregating credit (or other asset) losses that would materialize at individual banks in the event of a severe shock.
MFRAF goes beyond this traditional approach by taking into account linkages among banks arising from counterparty exposures – or network spillover effects – as well as funding liquidity risk, that is, the risk of market-based runs on banks. The financial crisis illustrated the significant risks associated with a deterioration of funding liquidity.