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Transcript of The IMF’s Experience with Macro Stress- · PDF fileThe IMF’s Experience with Macro...
The IMF’s Experience with Macro Stress-Testing
ECB High Level Conference onSimulating Financial Instability
Frankfurt
July 12–13, 2007
Mark SwinburneAssistant Director
Monetary and Capital Markets DepartmentInternational Monetary Fund
22
OutlineOutline
•• Overview of the FSAPOverview of the FSAP
•• Stress Testing in FSAPsStress Testing in FSAPs-- generalgeneral-- specific experiencespecific experience
•• Issues Going ForwardIssues Going Forward
33
Overview of the FSAPOverview of the FSAP
44
To strengthen and deepen financial systems and enhance their resilience
• Reducing the potential for systemic crises
• Limiting the severity of crises
• Addressing structural weaknesses
FSAP ObjectivesFSAP Objectives
55
Analytical Tools and MethodologyAnalytical Tools and Methodology
•Financial Soundness Indicators
•Macro and sectoral balance sheet analysis
• Stress Tests•Early Warning Systems• Market-based indicators
and analysis (incl. CCA)
• Institutional, structural and market features
• The policy framework-crisis prevention and management
• Formal Standards and Codes assessments
Risks and vulnerabilities are identified using both quantitative tools and qualitative assessments
66
Analytical Tools and Methodology (2)Analytical Tools and Methodology (2)
““. . . No single model is ever likely to . . . No single model is ever likely to capture fully the diverse channels through capture fully the diverse channels through which shocks may affect the financial which shocks may affect the financial system. Stress testing will, therefore system. Stress testing will, therefore remain a complement to, rather than a remain a complement to, rather than a substitute for [broader analysis] . . . .substitute for [broader analysis] . . . .””
Bunn et al. (2005)Bunn et al. (2005)
77
Stress Testing in FSAPs:Stress Testing in FSAPs:
GeneralGeneral
88
Stress Testing in FSAPsStress Testing in FSAPs•• A key quantitative tool in financial stability A key quantitative tool in financial stability
assessments. assessments.
•• Complemented by qualitative assessments and Complemented by qualitative assessments and other quantitative analyses other quantitative analyses
•• Tailored to countryTailored to country--specific circumstances.specific circumstances.
•• Identification of Identification of ““good practicesgood practices”” ongoing.ongoing.
•• Learning experience/tool for dialogue. Learning experience/tool for dialogue.
99
Stress Testing ApproachesStress Testing Approaches• Sensitivity tests
Shocks to single risk factors
• Scenario-based testsMultiple risk factorsMultiple risk factors
•• Bottom upBottom upBased on individual bank portfolios Based on individual bank portfolios
•• Top downTop downAggregate systemAggregate system--wide modelwide model
1010
Stress Testing Approaches (2)Stress Testing Approaches (2)
Key features in FSAP testing:Key features in FSAP testing:
•• Internally consistent macro scenarios now central Internally consistent macro scenarios now central •• Uniformity of the shocks within each peer groupUniformity of the shocks within each peer group•• Some form of bottomSome form of bottom--up analysis is criticalup analysis is critical•• Purely topPurely top--down analysis as a consistency checkdown analysis as a consistency check• “Extreme but plausible” guiding principle•• Some flexibility neededSome flexibility needed——data and modelsdata and models
1111
Stress Testing in FSAPs:Stress Testing in FSAPs:
Specific ExperienceSpecific Experience
1212
FSAP Experience with FSAP Experience with Stress TestingStress Testing
•• Most FSAPs conduct singleMost FSAPs conduct single--factor sensitivity analysisfactor sensitivity analysis•• Recent FSAPs:Recent FSAPs:
Macroeconomic scenario analysisMacroeconomic scenario analysisInvolve the authoritiesInvolve the authoritiesInvolve financial institutionsInvolve financial institutions-- bankbank--byby--bank implementationbank implementation
Include interbank contagionInclude interbank contagionInclude nonbank financial institutionsInclude nonbank financial institutions
1313
Coverage in FSAPsCoverage in FSAPs
(percent of all FSAPs initiated in the period)(percent of all FSAPs initiated in the period)
37372525•• Insurance sector stressInsurance sector stress--testedtested38381111
•• Interbank contagion taken into Interbank contagion taken into accountaccount
95956464•• Scenario analysis Scenario analysis
20032003––050520002000––20022002
Stress tests have become more sophisticated over time:
1414
Risks Addressed in FSAP Risks Addressed in FSAP Stress Tests Stress Tests
•• Credit RiskCredit Risk
•• Market Risk Market Risk
-- Interest rateInterest rate
-- Exchange RateExchange Rate
•• Liquidity RiskLiquidity Risk
•• Contagion/Operational Risk Contagion/Operational Risk
1515
Credit Risk Credit Risk
•• The most significant source of riskThe most significant source of risk
•• The most in need of strengtheningThe most in need of strengthening
1616
Credit Risk (Credit Risk (Continued)Continued)
•• Single equation models for household and Single equation models for household and corporate sectors corporate sectors
•• Credit quality as function of macroeconomic Credit quality as function of macroeconomic variablesvariables
Examples:Examples:Hong Kong: Single equation aggregate estimate Hong Kong: Single equation aggregate estimate and panel estimates using bankand panel estimates using bank--byby--bank databank data
Denmark: Robust VaR over business cycle in Denmark: Robust VaR over business cycle in datadata--restricted environmentrestricted environment
1717
Credit Risk ScenariosCredit Risk ScenariosDepending on specific (macroeconomic) circumstances of the country, and data availability:
• NPL & loan provisioning (most countries), e.g.,NPL migration analysis/loan reclassification.
• Sophisticated analysis on PDs and LGDs,(including effect from macro factors).
• Specific: Cross-border lending (e.g., Austria), Foreign exchange lending (e.g., Jamaica), Loan concentration (e.g., Netherlands, Russia).
1818
Market Risk Market Risk
• Relatively well addressed through prudential supervision—often implemented using internal models
• Correlation of market and credit risk through indirect credit risk often not covered well.
1919
Market Risk: Type of AnalysisMarket Risk: Type of AnalysisInterest rate risk analysis:
• Repricing/Maturity Gap (e.g., Hungary)
• Duration (e.g., Czech Rep, Israel)
• Value at Risk (e.g., Belgium, Italy)
Exchange rate risk analysis:
• Net open position (e.g., Bulgaria, Sweden)
• Value at Risk (e.g., France, Germany)
2020
Market Risk: ScenariosMarket Risk: Scenarios•• Ad hoc, hypothetical, or historical interest rate Ad hoc, hypothetical, or historical interest rate
increase:increase:-- Parallel shift in yield curveParallel shift in yield curve-- Steepening/flattening yield curveSteepening/flattening yield curve
•• Ad hoc, hypothetical, or historical devaluation/ depreciation/appreciation
•• Basel Committee Amendment to Basel Committee Amendment to Capital Accord Capital Accord to incorporate market riskto incorporate market risk
2121
Liquidity Risk and Equity, Real Liquidity Risk and Equity, Real Estate Price ShocksEstate Price Shocks
Liquidity Risk:
• Change liquidity ratio, either ad hoc (Austria, UAE), or based on historical data (France, Croatia)
Equity/Real Estate Risk:• Shock to stock market (e.g., Finland, South Africa)• Housing Price Shock (e.g., Hong Kong, Ireland)• LTV ratios, mortgage PDs (e.g., Belgium, Australia)
2222
Other RisksOther Risks
• Commodity prices (e.g., Finland, New Zealand)
• Country exposure risk (e.g., Luxembourg)
• Shocks to specific sectors (e.g., Belarus, New Zealand: Agriculture; Finland: ICT)
• Interbank contagion (next slide)
2323
Contagion RiskContagion Risk•• Complementary to stress tests of individual institutionsComplementary to stress tests of individual institutions•• May highlight some vulnerabilities of the systems in May highlight some vulnerabilities of the systems in
addition to simply the effect of common shocksaddition to simply the effect of common shocks•• Methodology: Matrix of institutionMethodology: Matrix of institution--toto--institution institution
exposuresexposuresTypically net uncollateralized interbank lendingTypically net uncollateralized interbank lendingPayments systems exposures, ownership linksPayments systems exposures, ownership linksCould also be constructed for liquidity contagion based Could also be constructed for liquidity contagion based on experience from past runson experience from past runsExtreme Value Theory coExtreme Value Theory co--exceedances?exceedances?
2424
Issues Going ForwardIssues Going Forward
2525
Going ForwardGoing Forward——MethodologiesMethodologiesFurther develop methodologies:Further develop methodologies:
•• Credit risk analysisCredit risk analysis•• Correlations between market, liquidity and Correlations between market, liquidity and
credit risk credit risk •• ContagionContagion•• CrossCross--border issuesborder issues•• 22ndnd round effects, financial round effects, financial macromacro•• Reaction functionsReaction functions•• Conglomerates/Insurance Companies (other Conglomerates/Insurance Companies (other
NBFIs?)NBFIs?)•• Operational risk (?)Operational risk (?)
2626
Going Forward Going Forward -- FSAP ProcessesFSAP Processes““No one modelNo one model”” Need to better integrate Need to better integrate stress tests and analysis of other indicators.stress tests and analysis of other indicators.
Improving availability and quality of FSIs (coordinated Improving availability and quality of FSIs (coordinated compilation exercise); compilation exercise);
““benchmarkingbenchmarking”” of FSIs, links among FSIs and to other of FSIs, links among FSIs and to other indicators.indicators.
More explicit sectoral balance sheet analysis; More explicit sectoral balance sheet analysis; More explicit use of market indicators, and analysis More explicit use of market indicators, and analysis
thereof.thereof.Awareness of what the tests are not testing for (data Awareness of what the tests are not testing for (data
and model limitations, potential structural breaks and and model limitations, potential structural breaks and nonlinearities)nonlinearities)
2727
Going ForwardGoing Forward——FSAP Processes (2)FSAP Processes (2)
Balance between uniformity versus caseBalance between uniformity versus case--byby--case approach in FSAPs. case approach in FSAPs.
Further identify good practices for FSAPs. And Further identify good practices for FSAPs. And useful more broadly? useful more broadly? ““TemplateTemplate”” for small, lessfor small, less--complex financial complex financial systemssystemsDialogue with people at supervisory agencies Dialogue with people at supervisory agencies and central banks (e.g., Bundesbank web and central banks (e.g., Bundesbank web platform following last yearplatform following last year’’s forum at IMF)s forum at IMF)