Stress Testing: A Review of Key Concepts

The note is a review of the literature on the quantitative methods used to assess the vulnerabilities of financial systems to risks. In particular, the author focuses on the role of system-wide stress testing. He summarizes the recent developments in the literature, highlighting topics relevant for the Czech case. He presents the key concepts relating to systemwide stress tests, overviews the stress tests performed by central banks and international financial institutions, and discusses conceptual issues relating to modeling of individual risk factors.Financial soundness, macroprudential analysis, stress tests.

Systemic Loss: A Measure of Financial Stability (in English)

The literature on modeling defaults in individual financial institutions has expanded dramatically. However, the links between defaults in individual institutions and system-wide crises remain inadequately understood, despite some recent attempts to transpose the existing indicators of the probability of default in individual institutions to the systemic level. The paper argues that any measure of systemic stability should incorporate three elements: probabilities of failure in individual financial institutions, loss given default in financial institutions, and correlation of defaults across institutions. It contains a review of existing measures of financial stability and finds that they generally fall short of this standard. The author demonstrates that looking at the distribution of systemic loss can lead to a clearer differentiation of cases of stability and instability.failures; financial sector; market-based indicators; soundness indicators

Designing Stress Tests for the Czech Banking System

The note discusses key issues involved in designing a suitable set of stress tests for the Czech banking system. The aim of the note is to propose stress tests that could be used by the Czech National Bank on a regular basis to assess the soundness of domestic banks, both for purposes of macroprudential surveillance and for banking supervision. The author suggests that the exercise be broadly based on the stress tests conducted during the 2001 IMF-World Bank Financial Sector Assessment Program (FSAP) mission to the Czech Republic. He summarizes the FSAP stress tests, and proposes a number of extensions and modifications. The key recommendations are presented in a table that covers also data requirements and a suggested timeframe for implementation. The note includes results of a replication of the Czech FSAP stress tests for mid-2003 data.Banking system, stress tests.

Price Convergence: What Can the Balassa-Samuelson Model Tell Us?

The paper provides a theoretical reference point for discussions on adjustments in price levels and relative prices. The authors present a 'nested' model integrating the Balassa-Samuelson model of the real equilibrium exchange rate with a model of accumulation of capital and with the demand side of the economy. Consequently, they show how the model can be generalised to a case of numerous commodities with different degrees of tradability. The predictions of the model are generally consistent with empirical findings for Central and Eastern European countries. The authors show how the theoretical model can be used for internally consistent simulations of the future convergence process in a transition economy.Balassa-Samuelson model, inflation, relative prices.

Price Convergence to the EU: What Do the 1999 ICP Data Tell Us?

The paper analyses the price convergence in the Czech Republic and other Central and Eastern European (CEE) countries towards the European Union (EU). Cross-country comparisons based on the International Comparison Project (ICP) 1999 are used. The authors conclude that in a benchmark convergence scenario, the equilibrium real exchange rate appreciation of the Czech koruna (CZK) should reach roughly 1.5-2.0 percent a year. They also warn, however, that there may be additional sources of real appreciation such as terms-of-trade changes or price deregulations, which may lead to a higher pace in the medium run. Studying a more detailed breakdown of commodities, the authors find that no clear distinction can be made between tradable and non-tradable goods, the 'degree of non-tradability' varying between 10 and 85 percent. The implications of this for differences in the structures of relative prices in the CEE countries compared with the EU are analysed. The paper concludes that it may take about 15 years for the Czech relative price structure to converge to the least-developed EU countries.Balassa-Samuelson model, inflation, relative prices.

Monetary Policy Rules with Financial Instability

To provide a rigorous analysis of monetary policy in the face of financial instability, we extend the standard dynamic stochastic general equilibrium model to include a financial system. Our simulations suggest that if financial instability affects output and inflation with a lag, and if the central bank has privileged information about credit risk, monetary policy responding instantly to increased credit risk can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the simple Taylor rule. This augmented rule leads in some parameterizations to improved outcomes in terms of long-term welfare, however, the welfare impacts of such a rule appear to be negligible.DSGE models, financial instability, monetary policy rule.

Letter to Jean Holcomb regarding potential new scholarship awards, September 27, 1991

A letter from Herb Cihak to Jean Holcomb noting Cihak\u27s opposition to creating new scholarship awards unless they are funded separately from the general scholarship money pool

Email to Catherine Lemann regarding SEAALL Handbook, February 8, 2001

An email from Herb Cihak to Catherine Lemann discussing changes to the SEAALL Handbook

Letter to Wes Daniels regarding letters of recommendation, October 9, 1990

A letter from Herb Cihak to Wes Daniels suggesting that the Scholarship Committee not require letters of recommendation for applicants

Email to Nancy Johnson regarding SEAALL Scholarships, February 22, 2001

An email from Herb Cihak to Nancy Johnson discussing whether a recipient of a SEAALL scholarship should be allowed to accept other scholarships in addition to the SEAALL scholarship