Such stress-tests – which would need to fully incorporate the derivative positions of institutions and their exposure to liquidity shocks – would offer a more comparable assessment of the health of individual institutions and, when considering feedback loops within the financial system and the economy, of the resilience of the system as a whole.
Of course, the nonlinear risks associated with a collapsing bubble may depend on the initial health of the financial system, and under some circumstances we could be worried about the potential for significant financial distress to accompany the bursting of a bubble, should that bubble expand further.