The BoR Approach to Macroprudental Stress Testing - Central … 1... · 2018. 11. 14. · THE BOR...

THE BOR APPROACH TO

MACROPRUDENTIAL STRESS TESTING

September, 2018

The BoR Approach to MacroprudentalStress Testing

Financial Stability Department

THE BOR APPROACH TO

MACROPRUDENTIAL STRESS TESTING2

Assessment of losses and absorbing capacity of financial system in the stress scenario taking into account contagion

risks and feedback effects within the system (banks, non-bank financial organizations, non-financial sector)

Detection of most significant risks for financial system and economy

Close monitoring of identified vulnerabilities and development of policy toolkit

(precautionary and anti-crisis measures)

Macroprudentialstress test

is conducted by the authority responsible for ensuring financial

stability (the Bank of Russia)

PURPOSE OF MACROPRUDENTIAL STRESS TESTING

*The Bank of Russia published the Concept of macroprudential stress testing for public consultations in November 2017

THE BOR APPROACH TO

MACROPRUDENTIAL STRESS TESTING3USE OF MACROPRUDENTIAL STRESS TEST FOR FINANCIAL STABILITY PURPOSES

Planning anti-crisis

measures

Implementing

macroprudential

policy

•Assessing amount of funds that may be

required for recapitalization of banks

•Planning anti-crisis refinancing policy in

ruble and FX

•Timing of regulatory forbearance

measures

Macroprudential stress testing is supposed

to provide analytical support for

macroprudential policy framework

(countercyclical capital buffer and

macroprudential add-ons to risk weights)

THE BOR APPROACH TO

MACROPRUDENTIAL STRESS TESTING4KEY FEATURES OF MACROPRUDENTIAL STRESS TEST OF THE BANK OF RUSSIA

Group basis (the largest banks and financialgroups, covering 80% of the financial system)

The most granular data(trade repository database,transaction based reports,surveys of financial sector)to assess financial risks

Relevant stress scenario (extreme butplausible commodity shock), all significantfinancial risks (market, liquidity, credit), fivetime horizons

Mutual financialexposures and contagionrisks in the financial sector(network analysis of moneymarket, derivative market)

Macroprudential stress testof the Bank of Russia

THE BOR APPROACH TO

MACROPRUDENTIAL STRESS TESTING5MACROPRUDENTIAL STRESS TEST PERIMETER

Stress test perimeter (2017) – 39 largest banking and financial groups

• Banks (73 banks which account for about 85% of the banking sector assets)

• Non-governmental pension funds with an amount of assets under management

in each fund exceeding 20 billion rubles (14 NPFs which accumulate almost 90%

AUM)

• Systemically important insurance companies (14 insurance companies, which

account for more than 60% of assets)

Stress test perimeter extension (2018)

• Broker-dealers

• Development institutions (Vnesheconombank, DOM RF)

THE BOR APPROACH TO


On demand side (world economic

growth decline)

Global risks

On supply side (extensive growth

of oil production in US and other

countries)

KEY GLOBAL RISKS WHICH MAY HAVE NEGATIVE IMPACT ON RUSSIA

Decline in oil prices

Potential shock• Major central banks policy normalization

• Escalation of trade conflicts

• Political risks

Spillover effects

Market risks (volatility, higher

rates, capital outflow, FX liquidity

shortage)

Negative impact on

financial sector

Macroeconomic effects

(GDP growth decline, budget

deficit)Second round

effects

6

THE BOR APPROACH TO


HISTORICALLY OIL PRICE HAS BEEN A KEY FACTOR DETERMINING PRIVATE CAPITAL FLOWS IN RUSSIA

Source: Bloomberg, Thomson Reuters, Bank of Russia.

0

20

40

60

80

100

120

140

-100

-80

-60

-40

-20

0

20

40

31.0

3.2

00

1

31.1

2.2

00

1

30.0

9.2

00

2

30.0

6.2

00

3

31.0

3.2

00

4

31.1

2.2

00

4

30.0

9.2

00

5

30.0

6.2

00

6

31.0

3.2

00

7

31.1

2.2

00

7

30.0

9.2

00

8

30.0

6.2

00

9

31.0

3.2

01

0

31.1

2.2

01

0

30.0

9.2

01

1

30.0

6.2

01

2

31.0

3.2

01

3

31.1

2.2

01

3

30.0

9.2

01

4

30.0

6.2

01

5

31.0

3.2

01

6

31.1

2.2

01

6

30.0

9.2

01

7

From June 2004 to June 2006 Fed funds rate (upper bound) wasincreased from 1% to 5.25%, till August 2007 the rate remained at5.25%Since December 2015 Fed funds rate (upper bound) was increased from0.25% to 1.75%

Net private capital inflow in/outflow from Russian banking sector,quarterly balance of payment data (bln USD)

Urals (USD per barrel), right axis

Oil price and capital flows

1.

2.

1

.

2

.

20%

25%

30%

35%

40%

45%

50%

55%

60%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Share of oil revenues in total federal budget revenues (%)

Share of revenues from exports of crude oil and oil products inthe total export earnings (%)

Source: Ministry of Finance, Bloomberg.

THE BOR APPROACH TO


•The base price of oil is supposed to redistribute additional oil and gas revenuesbetween phases of the oil cycles, smoothing fluctuations in the budget expenditures

8BUDGET RULE HELPS TO LIMIT VOLATILITY CAUSED BY OIL PRICE FLUCTUATIONS

THE BOR APPROACH TO


Stress testing

horizonType of risk Perimeter

2 working days Market risk, liquidity risk Banks, National Clearing Centre (CCP)

1 month Market risk, liquidity risk Banks

1 quarter Market risk, interest rate riskBanks, insurance companies, non-

governmental pension funds

1 yearMarket risk, interest rate risk,

credit risk, insurance risk

Banks, insurance companies, non-


2 yearsMarket risk, interest rate risk,

credit risk

Banks, insurance companies, non-


STRESS TESTING HORIZON AND TYPES OF ASSESSED RISKS 9

THE BOR APPROACH TO


Materialization of a stress scenario (approach to each market instrument is defined separately on historical data - 10 years or crisis periods, CVaR 1%)

The need for additional liquidity

• To satisfy margin calls by adding cash or securities to CCP

• To maintain positions on the OTC market

Correction of positions in the money market

• Participants with liquidity shortage decrease amount of lending

Participants having insufficient amount of liquid assets fail to fulfill obligations to CCP

If the lines of defense are insufficient CCP implements loss-allocation procedures

STAGES OF A 2-DAY STRESS TEST IMPLEMENTATION 10

THE BOR APPROACH TO

MACROPRUDENTIAL STRESS TESTING11RESULTS ON A 2-DAY HORIZON

The ratio of high liquid assets to required amount of liquidity

-50

0

50

100

150

200

250

300

Bank 1

Bank 2

Bank 3

Bank 4

Bank 5

Bank 6

Bank 7

Bank 8

Bank 9

Bank 1

0

Bank 1

1

Bank 1

2

Bank 1

3

Bank 1

4

Bank 1

5

Bank 1

6

Bank 1

7

Bank 1

8

Bank 1

9

Bank 2

0

Bank 2

1

Bank 2

2

Bank 2

3

Bank 2

4

Bank 2

5

Bank 2

6

Bank 2

7

Bank 2

8

Bank 2

9

Bank 3

0

Bank 3

1

Bank 3

2

Bank 3

3

Bank 3

4

Bank 3

5

Bank 3

6

Bank 3

7

Bank 3

8

Bank 3

9

Bank 4

0

Bank 4

1

Bank 4

2

Bank 4

3

Stress scenario Baseline scenario

Liquidity

shortage

THE BOR APPROACH TO


Macro scenario

Interest rate

risk

Exchange rate

Equities RiskCredit risk for

Russia

Non-ruble interest

rates for Russian

eurobonds

Credit risk

spread

Ruble

interest

rate

Shares and

depositary

receipts

Russian

sovereign

bonds

Russian

corporate

bonds

Russian

sovereign

eurobonds

Russian

corporate

eurobonds

Foreign

bonds

Russian equities

price drop

Foreign

exchange risk

Modified duration

MARKET RISK 12

THE BOR APPROACH TO


Corporate portfolio stress testing

Macroeconomic

parameters of the stress

scenario (Monetary

Policy Department)

Financial indicators

(Federal State Statistics

Service)

Projected financial

indicators

Data on loan

indebtedness (credit

registry)

Projected provision

Estimate of loan loss

provision taking into

account collateral

Neuralnetwork

Panelregression

CREDIT RISK

• Gross profitability of the borrower• Current liquidity ratio• Borrower’s autonomy ratio• Interest rate coverage ratio• Relation to tradable sector • Current provision

• Number of days the loan is overdue

THE BOR APPROACH TO


Baseline

scenario

Stress

scenario

Number of banks with liquidity shortfall

Banking groups (of which systemically important credit institutions)

Liquidity shortfall – difference between deposit outflow and amount of liquid assets

(banks with liquidity shortfall)

Liquidity deficit coverage

Amount of intragroup liquidity support

BoR emergency liquidity support measures

Liquidity deficit after support measures

Banking groups with liquidity shortage after support measures (of which systemically

important credit institutions)

14LIQUIDITY SHORTAGE ON A 1-MONTH HORIZON (IN RUBLES AND FX)

THE BOR APPROACH TO


Baseline

scenario

Stress

scenario

Number of banks with capital shortfall

Banking groups (of which systemically important credit institutions)

Total losses

Market risk*

FX revaluation

Capital needed to comply with regulatory required level of capital adequacy ratio (at 8%)

Groups of systemically important credit institutions

Other groups

15CAPITAL SHORTAGE ON A 1-MONTH HORIZON

* Market risk can be partly mitigated by temporary relax measures - the right not to revaluate bonds (transferthem to the held to maturity bond portfolio), as in December 2014. These measures can help “to win time” andlimit contagion effects.

THE BOR APPROACH TO


Cumulative dataBaseline

scenario

Stress

scenario

Total losses, of which

Credit risk

Market risk

Interest rate risk

Credit risk of insurance companies and non-governmental pension funds

Results of insurance companies activities (including insurance risk)

Positive FX revaluation

Capital deficit in the financial sector (capital needed to comply with regulatory required level of

capital adequacy ratio at 8%)

Systemically important credit institutions

Other groups

Number of groups with capital shortfall

Systemically important credit institutions

Other groups

16STRESS TEST ON 1-YEAR AND 2 YEAR HORIZONS

THE BOR APPROACH TO


• Contagion effect reflects the amount of losses suffered by the stress test participants due todefault of their counterparties in the previous period

• Prevention of the contagion effect at an early stage helps to reduce the capital deficit in thelate horizons

1 Month 1 Quarter 1 Year 2 Years

Str

ess

scenario

Number of groups with capital/liquidity shortfall

Total losses

Losses from network effect

Share of network effect, % 36 59 23 20

17CONTAGION EFFECT

Group-defaulters with the ratio of contagion effect to capital deficit > 1 can be attributed to

“hidden” systemically important organizations. Elimination of the contagion effect coming from

these groups may reduce the capital deficit of other stress test participants

THE BOR APPROACH TO


Bank 1

Bank 2

Bank 3

Bank 4

Bank 5

Bank 6

Bank 7

Bank 8

Bank 9

Bank 1

0

Bank 1

1

Bank 1

2

Bank 1

3

Bank 1

4

Bank 1

5

Bank 1

6

-8

-4

0

4

8

12Before ST

Additional Capital

Capital Conservation Buffer

SIB Buffer

Bank 1

Bank 2

Bank 3

Bank 4

Bank 5

Bank 6

Bank 7

Bank 8

Bank 9

Bank 1

0

Bank 1

1

Bank 1

2

Bank 1

3

Bank 1

4

Bank 1

5

Bank 1

6

After ST

Additional Capital

Capital Conservation Buffer

SIB Buffer

Deficit Low buffer

MACROPRUDENTIAL MEASURES

• Capital deficit (identified as a result of macropru stress test) can be covered withcountercyclical capital buffer (CCyB)

• Banks with substantial capital buffer can be insensitive to increasing CCyB, but may bevulnerable to particular shocks => potential to use additional Pillar 2 requirements or sectoralmacropru add-ons

18

THE BOR APPROACH TO


Comparison and cross-checking the results of the top-down stress test

conducted by the Financial Stability Department with the results of the bottom-up

stress test

Analysis of the network effect:

• Interconnectedness of the stress test participants

• Results of the macropru stress test taking into account influence of support

measures and contagion effects within and between the groups

Attribute analysis of total losses of macropru stress test participants broken down

by participants, risks, instruments

Extrapolation of losses (by type of risks) to other organizations beyond the

macropru stress test perimeter

RECOMMENDATIONS FOR SUPERVISORS

THE BOR APPROACH TO

MACROPRUDENTIAL STRESS TESTING20APRIL 2018: IMF MISSION ON MACROPRUDENTIAL STRESS TESTING

Using a set of scenarios

• Development of an annual plan on stress testingfor 2019 (including macropru ST, supervisory ST)

• Creation of a Working Group on stress testing atthe BoR

Current work at the BoRIMF key recommendations

Clearer organization process and internalcooperation between departments

Implementation of an expected loss basedapproach for credit risk, better integrationof models

Additional data collection for risk analysis

Enhancing the use of contagion models

• Improvement of reporting forms on interest raterisk, liquidity risk

• Plan to conduct a survey of expected losses onbank portfolios

Development of several scenarios for top-down ST(cyclical, structural, alternative, etc.)

Work on PD model to assess credit risk

Work in progress

THE BOR APPROACH TO


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The BoR Approach to Macroprudental Stress Testing - Central … 1... · 2018. 11. 14. · THE BOR...

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