13,641 research outputs found
Bank stress tests as an information device for emerging markets: The case of Russia
The recent financial crisis emphasised the need for effective financial stability analyses and tools for detecting systemic risk. This paper looks at assessment of banking sector resilience through stress testing. We argue such analyses are valuable even in emerging economies that suffer from limited data availability, short time series and structural breaks. We propose a top-down stress test methodology that employs relatively limited information to overcome this data problem. Moreover, as credit growth in emerging economies tends to be rather volatile, we rely on dynamic approach projecting key balance sheet items. Application of our proposed stress test framework to the Russian banking sector reveals a high sensitivity of the capital adequacy ratio to the economic cycle that shows up in both of the two-year macroeconomic scenarios considered: a baseline and an adverse one. Both scenarios indicate the need for capital increase in the Russian banking sector. Furthermore, given that Russia’s banking sector is small and fragmented relative to advanced economies, the loss of external financing can cause profound economic stress, especially for medium-sized and small enterprises. The Russian state has a low public debt-to-GDP ratio and plays decisive role in the banking sector. These factors allow sufficient fiscal space for recapitalisation of problematic banks under both of our proposed baseline and adverse scenarios.stress testing; bank; Russia
Living with Macro-financial Linkages: Policy Perspectives and Challenges for SEACEN Countries
The deepening financial liberalisation and the tightening of financial integration globally have made it more challenging to manage macroeconomic policies in general, and to contain the spread of financial turbulence in particular. The financial sector has been shown to be inherently pro-cyclical and capable of amplifying macroeconomic volatilities, making management of monetary policy increasingly complex. In these ever changing financial landscapes, the success of monetary policy and macroeconomic policies, in general, hinges on the ability of policy makers to design policies that explicitly take into account macro-financial channels, and to interpret more cautiously the potential risk in financial system disruptions that can rapidly destabilise macroeconomic stability. The objective of this study is to take stock and examine the impact of linkages between macroeconomic development and financial market condition with a special focus on the SEACEN economies.
Living with Macro-financial Linkages: Policy Perspectives and Challenges for SEACEN Countries
The deepening financial liberalisation and the tightening of financial integration globally have made it more challenging to manage macroeconomic policies in general, and to contain the spread of financial turbulence in particular. The financial sector has been shown to be inherently pro-cyclical and capable of amplifying macroeconomic volatilities, making management of monetary policy increasingly complex. In these ever changing financial landscapes, the success of monetary policy and macroeconomic policies, in general, hinges on the ability of policy makers to design policies that explicitly take into account macro-financial channels, and to interpret more cautiously the potential risk in financial system disruptions that can rapidly destabilise macroeconomic stability. The objective of this study is to take stock and examine the impact of linkages between macroeconomic development and financial market condition with a special focus on the SEACEN economies.Macro-financial linkages, Macro-prudential, Stress-testing, Cross-border supervision, Basel III
Assessing the Resilience of ASEAN Banking Systems: The Case of the Philippines
Since the global financial crisis in 2008/09 there has been heightened concern about the resilience of banking systems in Southeast Asia. This paper proposes a methodology that uses a macroprudential perspective to assess the resilience of banking systems in member countries of the Association of Southeast Asian Nations. It then proceeds to apply this methodology to examine the resilience of the Philippine banking system. Data on financial soundness in the Philippine banking system are utilized in a vector autoregression model to study the dynamic relationships that exist among financial and macroeconomic indicators. Using impulse response functions, a simulation of financial ratios in the banking system is conducted by assuming unlikely but plausible stress scenarios to determine whether banking system credit and capital could withstand the impact of such circumstances. In the stress scenarios, the estimated impact of macroeconomic shocks on nonperforming loan and capital adequacy ratios is generally minimal. The results, however, do suggest that the Philippine banking system has some vulnerability to interest rate and stock market shocks. The results of such stress testing provide a better understanding of the level of preparedness required for managing risks in the financial system, especially in the wake of continuing global economic uncertainty.Banking System; Macroprudential; Stress Testing; Philippines; Panel VAR
GDP at risk in a DSGE model: an application to banking sector stress testing
We suggest a complementary tool for financial stability analysis based on stochastic simulation of a dynamic stochastic general equilibrium model (DSGE) of the macro economy. The paper relates to financial stability research in which financial aggregates crucial to financial stability are modelled as functions of macroeconomic variables. In these models, stress tests for eg banking sector loan losses can be generated by considering adverse scenarios of macro variables. A DSGE model provides a systematic way of generating coherent macro scenarios which can be given a rigorous economic interpretation. The approach is illustrated using a DSGE model of the Finnish economy and a simple model of Finnish banking sector loan losses.DSGE models; financial stability; loan losses; stress testing
Assessing portfolio credit risk changes in a sample of EU large and complex banking groups in reaction to macroeconomic shocks
In terms of regulatory and economic capital, credit risk is the most significant risk faced by banks. We implement a credit risk model - based on publicly available information - with the aim of developing a tool to monitor credit risk in a sample of large and complex banking groups (LCBGs) in the EU. The results indicate varying credit risk profiles across these LCBGs and over time. Furthermore, the results show that large negative shocks to real GDP have the largest impact on the credit risk profiles of banks in the sample. Notwithstanding some caveats, the results demonstrate the potential value of this approach for monitoring financial stability. JEL Classification: C02, C19, C52, C61, E32macroeconomic shock measurement, Portfolio credit risk measurement, stress testing
Sources of pro-cyclicality in east Asian financial systems
Procyclicality is a normal feature of economic systems, but financial sector
weaknesses can exacerbate it sufficiently to pose a threat to macroeconomic and financial
stability. These include shortcomings in bank risk management and governance, in
supervision and in terms of dependence on volatile sources of funds. The paper tests
econometrically for the importance of such features leading to pro-cyclicality in the financial
systems of 11 East Asian countries. This analysis makes it possible to identify specific policy
measures for East Asian countries that could limit the extent to which financial systems
exacerbate pro-cyclicality
A Macroprudential Framework for Monitoring and Examining Financial Soundness
This paper describes concepts and tools behind macroprudential monitoring, and the growing importance of macroprudential tools for assessing the stability of financial systems. This paper also employs a macroprudential approach in examining financial soundness and identifying its determinants. Using data from selected developing economies in Asia, South America, and Europe, as well as selected economies from the developed world, panel regressions are estimated to quantify the impacts of the major influences on key financial soundness indicators, including capital adequacy, asset quality, and earnings and profitability.Macroprudential; banks; banking crises; banking regulation; banking supervision; stress testing; early warning system
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Credit Risk and Macroeconomic Stress Tests in China
This paper examines the vulnerability of commercial banks in China to the changes in macroeconomic conditions by employing a macroeconomic stress test. We particularly focus on how the changes in housing market related variables and the scale of shadow banking influence the credit risks of China’s entire banking system. Based on the result of a Vector Autoregression (VAR) model, we proceed with a five-scenario analysis. Our main finding is the ability of shadow banking to absorb the credit risks of commercial banks rather than there being a spill over effect, according to the data from Q1 2005 to Q2 2016.1 Moreover, the mortgage loan is risky to commercial banks during this period. In addition, our scenario analysis suggests that China’s banking system is relatively stable and that the Central Bank of China is capable of monitoring the credit risks of commercial banks using appropriate credit policies
Households’ response to economic crisis
This paper studies the economic impact of the current global economic downturn on the household sector. Household budgets can be negatively affected by declines in nominal wages and increases in unemployment. We empirically test this effect for the small open emerging economy. As a result of a lack of individual data on household finances, micro data are simulated. Our analysis clearly shows that there is a significant additional decline in consumption related to an increase in household default rates and unemployment. We find that potential household insolvencies have important implications for the financial system as well as for the macroeconomy.credit cycle; households’ distress; insolvency; household default; aggregate consumption
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