Systematic Risk, Macro Financial Linkages, and Stress Testing: Evidence from the Emerging Economy

Journal Article

2026

Published in: https://www.mdpi.com/2071-1050/18/3/1343

Abstract
This paper develops a comprehensive macro stress-testing (MST) framework to evaluate the
resilience of Saudi Arabia’s financial sector against systemic risk over the period 2010–2025.
The approach integrates macro financial linkages, credit risk modeling, and scenario analysis
to simulate the impact of severe but plausible shocks on capital adequacy ratios (CAR)
and capital shortfalls. Using Saudi macroeconomic data, the study demonstrates that GDP
growth and oil price fluctuations are dominant drivers of systemic risk, while inflation and
unemployment exert significant but secondary effects. Under severe adverse conditions, the
banking sector’s aggregate CAR declines to 9.6%, requiring an estimated capital injection of
3.7% of GDP. The findings underscore the strength of Saudi Arabia’s financial buffers, while
emphasizing the importance of dynamic capital buffer calibration, sectoral diversification,
and cross-border macroprudential coordination within the GCC. Policy recommendations
are provided to enhance stress-testing governance and fiscal and financial alignment. The
findings highlight the importance of dynamic counter-cyclical capital buffers, sectoral
diversification, liquidity resilience, and enhanced fiscal–financial coordination. Policy recommendations
are provided to guide SAMA and the Financial Stability Council in capital
planning, stress-test governance, and macroprudential policy design.
Keywords: systematic risk; macro stress test; macro financial linkages; financial stability;
capital adequacy; Saudi Arabia

• Publication Work Type: Funded Research Paper
• Publisher Name: SUSTAINABILITY (MDPI, SCOPUS & WoS Indexed)
• Volume Number: 18