Micro-Macroprudential Integration in Banking Stress Testing: Evidence from Liquidity and Solvency Shocks in the MENA Region

AbstractThis study develops a unified microprudential–macroprudential stress testing framework to examine how key financial risks—credit risk, interest rate risk, and exchange rate risk—affect the liquidity and solvency of conventional banks in the MENA region. Using a balanced panel of 81 banks from 2007 to 2023, we uncover significant nonlinear effects and complex interactions between risk factors and bank soundness indicators. The findings reveal that heightened credit risk and rising interest rates strengthen liquidity buffers, reflecting precautionary behavior and regulatory compliance, while simultaneously undermining solvency. Exchange rate fluctuations negatively impact solvency under moderate stress but trigger adaptive liquidity responses under extreme scenarios. Mediation analysis confirms that liquidity risk acts as a key transmission channel through which financial shocks deteriorate capital strength. Our results offer novel insights for policymakers aiming to enhance banking sector resilience through integrated stress testing, dynamic liquidity regulation, and robust risk governance, particularly under rising financial and geopolitical uncertainty in the MENA region.Keywords: Financial risk, Liquidity risk, Solvency, Credit risk, Exchange rate volatility, Interest rate risk, Stress testing, MENA banks, Macroprudential policy, Bank stability