When Banks Punch Back Macrofinancial Feedback Loops In Stress Tests
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| Author | : Mr.Mario Catalan |
| Publisher | : International Monetary Fund |
| Total Pages | : 65 |
| Release | : 2020-05-29 |
| Genre | : Business & Economics |
| ISBN | : 1513534912 |
In the presence of adverse macroeconomic shocks, simultaneous capital losses in multiple banks can prompt them to contract their balance sheets. These bank responses generate externalities that propagate in the form of macro-financial feedback loops. This paper develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into an otherwise standard macroeconomic structural vector autoregressive model. It shows that accounting for macro-financial feedback loops can significantly affect macroeconomic outcomes and bank-specific stress tests results. The heterogeneity in bank lending responses matters: it determines how each bank fares under adverse conditions and the external effects that banks impose on each other and on economic activity. The model can thus be used to assess the contributions of individual banks to systemic risk along the time dimension.
| Author | : Mr.Ivo Krznar |
| Publisher | : International Monetary Fund |
| Total Pages | : 49 |
| Release | : 2017-06-30 |
| Genre | : Business & Economics |
| ISBN | : 1484307100 |
Macro-feedback effects have been identified as a key missing element for more effective macro-prudential stress testing. To fill this gap, this paper develops a framework that facilitates the analysis of both the direct effects of macroeconomic shocks on the solvency of individual banks and feedback effects that allow for the amplification and propagation of shocks that can result from bank deleveraging and credit crunches. The framework ensures consistency in the key relationships between macroeconomic and financial variables, and banks’ balance sheets. This is accomplished by embedding a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomic model. The framework has numerous applications that can strengthen stress testing and macro financial analysis. Moreover, it provides an avenue for many extensions that address the challenges of incorporating other second-round effects important for comprehensive systemic risk analysis, such as interactions between solvency, liquidity and contagion risks. To this end, the paper presents some preliminary simulations of feedback effects arising from the link between the liquidity and solvency risk.
| Author | : J. Doyne Farmer |
| Publisher | : |
| Total Pages | : 729 |
| Release | : 2022-04-14 |
| Genre | : Mathematics |
| ISBN | : 1108830730 |
Discover current uses and future development of stress tests, the most innovative regulatory tool to prevent and fight financial crises.
| Author | : Mr.Tobias Adrian |
| Publisher | : International Monetary Fund |
| Total Pages | : 73 |
| Release | : 2020-02-05 |
| Genre | : Business & Economics |
| ISBN | : 1513520741 |
This paper explains specifics of stress testing at the IMF. After a brief section on the evolution of stress tests at the IMF, the paper presents the key steps of an IMF staff stress test. They are followed by a discussion on how IMF staff uses stress tests results for policy advice. The paper concludes by identifying remaining challenges to make stress tests more useful for the monitoring of financial stability and an overview of IMF staff work program in that direction. Stress tests help assess the resilience of financial systems in IMF member countries and underpin policy advice to preserve or restore financial stability. This assessment and advice are mainly provided through the Financial Sector Assessment Program (FSAP). IMF staff also provide technical assistance in stress testing to many its member countries. An IMF macroprudential stress test is a methodology to assess financial vulnerabilities that can trigger systemic risk and the need of systemwide mitigating measures. The definition of systemic risk as used by the IMF is relevant to understanding the role of its stress tests as tools for financial surveillance and the IMF’s current work program. IMF stress tests primarily apply to depository intermediaries, and, systemically important banks.
| Author | : Bryn Battersby |
| Publisher | : International Monetary Fund |
| Total Pages | : 37 |
| Release | : 2022-10-13 |
| Genre | : Business & Economics |
| ISBN | : |
During the COVID-19 pandemic and global financial crisis, governments swiftly served as financiers of last resort through large financial support measures (FSMs) such as loan and guarantee programs and equity injections in firms. This Staff Discussion Note argues that such FSMs prevented bankruptcies and attenuated the recession by increasing firms’ liquidity, reducing risk premiums, and boosting confidence. But FSMs also carry large and long-lasting fiscal costs and risks. The note presents recommendations for managing the legacies of the COVID-19 programs and preparing for future crises. Ideally, FSMs should be assessed and included in budget plans, though a balance needs to be struck between speed and scrutiny.
| Author | : International Monetary |
| Publisher | : International Monetary Fund |
| Total Pages | : 69 |
| Release | : 2021-05-28 |
| Genre | : Business & Economics |
| ISBN | : 151358412X |
This paper reviews quantitative tools of financial stability assessments under the Financial Sector Assessment Program (FSAP). A key focus of FSAPs is on methodologies to gauge risks on a system-wide level and propose mitigating measures. Therefore, the paper concentrates on the main elements of the FSAP’s macroprudential stress testing framework:(i) the interaction among solvency, liquidity, and contagion risks in the banking sector, (ii) the assessment of the health of nonbank financial institutions (NBFIs), their interactions with banks and their impact on financial markets, (iii) the assessment of the health of nonfinancial sectors and their links to the financial sector, and (iv) macroprudential policy analysis. The paper also reviews recent improvements in microprudential bank solvency stress testing—an important foundation for the macroprudential stress testing framework—and discusses new tools for emerging risks (climate change, fintech, and cyber).
| Author | : Mr.Mario Catalan |
| Publisher | : International Monetary Fund |
| Total Pages | : 42 |
| Release | : 2017-11-16 |
| Genre | : Business & Economics |
| ISBN | : 148432949X |
This paper studies the transmission of bank capital shocks to loan supply in Indonesia. A series of theoretically founded dynamic panel data models are estimated and find nonlinear effects of capital on loan growth: the response of weaker banks to changes in their capital positions is larger than that of stronger banks. This non-linearity implies that not only the level of capital but also its distribution across banks in the financial system affects the transmission of shocks to aggregate lending. Likewise, the effects of bank recapitalization on loan growth depend on banks’ starting capital positions and the size of capital injections.
| Author | : Iwan J. Azis |
| Publisher | : Springer |
| Total Pages | : 129 |
| Release | : 2014-12-11 |
| Genre | : Business & Economics |
| ISBN | : 9812872841 |
This book discusses the risks and opportunities that arise in Emerging Asia given the context of a new environment in global liquidity and capital flows. It elaborates on the need to ensure financial and overall economic stability in the region through improved financial regulation and other policy measures to minimize the emergent risks. "Managing Elevated Risk: Global Liquidity, Capital Flows, and Macroprudential Policy—An Asian Perspective" also explores the range of policy options that may be deployed to address the impact of global liquidity on domestic financial and socio-economic conditions including income inequality. The book is primarily aimed at policy makers, financial market regulators and supervisory agencies to help them improve national regulatory systems and to promote harmonization of national regulations and practices in line with global standards. Scholars and researchers will also gain important information and knowledge about the overall impacts of changing global liquidity from the book.
| Author | : International Monetary Fund. Monetary and Capital Markets Department |
| Publisher | : International Monetary Fund |
| Total Pages | : 33 |
| Release | : 2011-03-14 |
| Genre | : Business & Economics |
| ISBN | : 1498339174 |
MCM conducted a survey in December 2010 to take stock of international experiences with financial stability and the evolving macroprudential policy framework. The survey was designed to seek information in three broad areas: the institutional setup for macroprudential policy, the analytical approach to systemic risk monitoring, and the macroprudential policy toolkit. The survey was sent to 63 countries and the European Central Bank (ECB), including all countries in the G-20 and those subject to mandatory Financial Sector Assessment Programs (FSAPs). The target list is designed to cover a broad range of jurisdictions in all regions, but more weight is given to economies that are systemically important (see Annex for details). The response rate is 80 percent. This note provides a summary of the survey’s main findings.
| Author | : Divya Kirti |
| Publisher | : International Monetary Fund |
| Total Pages | : 59 |
| Release | : 2017-08-07 |
| Genre | : Business & Economics |
| ISBN | : 1484314395 |
Rather than taking on more risk, US insurers hit hard by the crisis pulled back from risk taking, relative to insurers not hit as hard by the crisis. Capital requirements alone do not explain this risk reduction: insurers hit hard reduced risk within assets with identical regulatory treatment. State level US insurance regulation makes it unlikely this risk reduction was driven by moral suasion. Other financial institutions also reduce risk after large shocks: the same approach applied to banks yields similar results. My results suggest that, at least in some circumstances, franchise value can dominate, making gambling for resurrection too risky.
