A Guide to IMF Stress Testing : Methods and Models

610 Pages·2014·15.084 MB·English

by  Li Lian Ong

A Guide to IMF Stress Testing
Methods and Models
Editor
Li Lian Ong
I N T E R N A T I O N A L M O N E T A R Y F U N D
©International Monetary Fund. Not for Redistribution
©2014 International Monetary Fund
Cover design: IMF Multimedia Ser vices Division
Cata loging- in- Publication Data
Joint Bank- Fund Library
A guide to IMF stress testing : methods and models / editor, Li Lian Ong. —
Washington, D.C. : International Monetary Fund, 2014.
p. ; cm.
Includes bibliographical references and index.
1. Financial crises. 2. Banks and banking, International. 3. International Monetary Fund. I. Ong, Li Lian.
II. International Monetary Fund.
HB3725.G84 2014
ISBN: 978- 1- 48436- 858- 9 (paper)
ISBN: 978- 1- 47555- 129- 7 (web PDF)
Disclaimer: Th e views expressed in this book are those of the author(s) and do not necessarily represent
the views of the IMF, its Executive Board, or IMF management.
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©International Monetary Fund. Not for Redistribution
For
Mark W. Swinburne
June 17, 1955– September 3, 2009
Assistant Director
Monetary and Capital Markets Department
International Monetary Fund
Manager, mentor, friend
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©International Monetary Fund. Not for Redistribution
Contents
Foreword ......................................................................................................................................................................................ix
JOSÉ VIÑALS
Ac know ledg ments ....................................................................................................................................................................xi
Abbreviations ...........................................................................................................................................................................xiii
Contributing Authors ............................................................................................................................................................xvii
1. Stress Testing at the International Monetary Fund: Methods and Models ............................1
LI LIAN ONG • MARTIN ČIHÁK
PART I THE ACCOUNTING BASED APPROACH
A. THE BALANCE SHEET BASED APPROACH
2. Introduction to the Balance Sheet– Based Approach to Stress Testing .................................13
CHRISTIAN SCHMIEDER • LILIANA SCHUMACHER
3. Stress Tester: A Toolkit for Bank- by- Bank Analysis with Accounting Data ............................17
MARTIN ČIHÁK
4. Into the Great Unknown: Stress Testing with Weak Data ............................................................45
LI LIAN ONG • RODOLFO MAINO • NOMBULELO DUMA
5. Next-G eneration Applied Solvency Stress Testing ........................................................................59
CHRISTIAN SCHMIEDER • CLAUS PUHR • MAHER HASAN
6. Of Runes and Sagas: Perspectives on Liquidity Stress Testing
Using an Iceland Example ......................................................................................................................71
LI LIAN ONG • MARTIN ČIHÁK
7. Next-G eneration Systemwide Liquidity Stress Testing ................................................................91
CHRISTIAN SCHMIEDER • HEIKO HESSE • BENJAMIN NEUDORFER • CLAUS PUHR • STEFAN W. SCHMITZ
8. Systemic Bank Risk in Brazil: A Comprehensive Simulation of
Correlated Market, Credit, Sovereign, and Interbank Risks .....................................................103
THEODORE BARNHILL JR. • MARCOS SOUTO
9. Modeling Correlated Systemic Bank Liquidity Risks ..................................................................123
THEODORE BARNHILL JR. • LILIANA SCHUMACHER
10. Review and Implementation of Credit Risk Models ..................................................................135
RENZO G. AVESANI • KEXUE LIU • ALIN MIRESTEAN • JEAN SALVATI
©International Monetary Fund. Not for Redistribution
vi Contents
11. Bankers without Borders? Implications of Ring- Fencing for Eu ro pe an
Cross- Border Banks ................................................................................................................................151
EUGENIO CERUTTI • ANNA ILYINA • YULIA MAKAROVA • CHRISTIAN SCHMIEDER
12. Conducting Stress Tests of Defi ned Benefi t Pension Plans .....................................................183
GREGORIO IMPAVIDO
B. THE NETWORK ANALYSIS APPROACH
13. Introduction to the Network Analysis Approach to Stress Testing ......................................205
MARCO A. ESPINOSA VEGA • JUAN SOLÉ
14. Cross- Border Financial Surveillance: A Network Perspective .................................................209
MARCO A. ESPINOSA VEGA • JUAN SOLÉ
15. Balance Sheet Network Analysis of Too- Connected- to- Fail Risk
in Global and Domestic Banking Systems .....................................................................................229
JORGE A. CHANL AU
PART II THE MARKET PRICE BASED APPROACH
A. THE EQUITY INDICATORS BASED APPROACH
16. Introduction to the Equity Indicators– Based Approach to Stress Testing .........................247
JORGE A. CHAN LAU
17. The Global Financial Crisis and Its Impact on the Chilean Banking System .....................249
JORGE A. CHAN LAU
18. Regulatory Capital Charges for Too- Connected-t o- Fail Institutions:
A Practical Proposal ...............................................................................................................................263
JORGE A. CHANL AU
B. THE EXTREME VALUE THEORY APPROACH
19. Introduction to the Extreme Value Theory Approach to Stress Testing .............................279
SROBONA MITRA
20. External Linkages and Contagion Risk in Irish Banks ................................................................281
ELENA DUGGAR • SROBONA MITRA
21. Identifying Spillover Risk in the International Banking System: An Extreme Value
Theory Approach....................................................................................................................................299
JORGE A. CHAN LAU • MARTIN ČIHÁK • SROBONA MITRA • LI LIAN ONG
C. THE CONTINGENT CLAIMS ANALYSIS APPROACH
22. Introduction to the Contingent Claims Analysis Approach for Stress Testing .................333
DALE F. GRAY • ANDREAS A. JOBST • CHENG HOON LIM • YINGBIN XIAO
23. Vulnerabilities of House hold and Corporate Balance Sheets in the United Kingdom
and Risks for the Financial Sector .....................................................................................................337
MARTA RUIZ ARRANZ
©International Monetary Fund. Not for Redistribution
Contents vii
24. Mea sur ing and Analyzing Sovereign Risk with Contingent Claims .....................................359
MICHAEL T. GAPEN • DALE F. GRAY • CHENG HOON LIM • YINGBIN XIAO
25. Factor Model for Stress Testing with a Contingent Claims Model of
the Chilean Banking System ..............................................................................................................387
DALE F. GRAY • JAMES P. WALSH
26. Systemic Contingent Claims Analysis .............................................................................................409
ANDREAS A. JOBST • DALE F. GRAY
27. Mea sur ing Systemic Risk-A djusted Liquidity ...............................................................................431
ANDREAS A. JOBST
PART III THE MACROFINANCIAL APPROACH
28. Introduction to the Macro-Financial Approach to Stress Testing .........................................449
ANDREA M. MAECHLER
29. A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector .......................453
FRANCISCO VAZQUEZ • BENJAMIN M. TABAK • MARCOS SOUTO
30. A Practical Example of the Nonperforming Loans Projection Approach to
Stress Testing ...........................................................................................................................................473
TORSTEN WEZEL • MICHEL CANTA • MANUEL LUY
31. Portfolio Credit Risk and Macroeconomic Shocks: Applications to Stress Testing
under Data- Restricted Environments .............................................................................................485
MIGUEL A. SEGOVIANO • PABLO PADILLA
32. Banking Stability Mea sures ................................................................................................................513
MIGUEL A. SEGOVIANO • CHARLES A. E. GOODHART
33. A Forward- Looking Macroprudential Stress Test for U.S. Banks ............................................531
GEOFFREY N. KEIM • ANDREA M. MAECHLER
34. The Real Eff ects of Financial Sector Risk ........................................................................................561
ALEXANDER F. TIEMAN • ANDREA M. MAECHLER
Index 579
TOOLKIT CONTENTS
The fi les listed below are available on the companion CD and at www.elibrary.imf.org/stress-test-toolkit.
Chapter 3
Stress Tester 3.0
Chapter 4
Excel Spreadsheet Macro for the Breaking Point Method
Chapter 5
Excel Spreadsheet Macro for the Next- Generation Solvency Stress Test
©International Monetary Fund. Not for Redistribution
viii Contents
Chapter 6
Excel Spreadsheet Macro for the Market and Funding Liquidity Stress Test
Chapter 7
Excel Spreadsheet Macro for the Next- Generation Systemwide Liquidity Stress Test
Chapter 10
Excel Add- in for the CreditRisk+ Model
Chapter 12
Excel Spreadsheet Macro for Stress Testing Defi ned Benefi t Pension Plans
Chapter 14
Excel- based Program for Bank Network Analysis
Chapter 20
Example Eviews Program Codes: External Linkages
Chapter 21
Example Eviews Program Codes: International Banking System
Chapter 24
Excel Spreadsheet for the Balance Sheet Risk Analysis
Chapter 33
Excel Spreadsheet Macro for Forward- Looking Macroprudential Stress Test
©International Monetary Fund. Not for Redistribution
Foreword
Th e global fi nancial crisis has placed a spotlight on the stress testing of fi nancial systems. Although weaknesses in stress tests
were exposed by the crisis, the recent experience of several countries has conversely provided a stark illustration of their poten-
tial benefi t in examining the resilience of bank balance sheets when performed credibly and transparently. Nonetheless, the
large menu of stress testing approaches, methods, and models raises questions about their appropriate application under diff er-
ent situations and, consequently, the comparability and reliability of the associated analyses.
Th e International Monetary Fund (IMF) has had a long and unique involvement in the stress testing of fi nancial systems.
Since the introduction of the Financial Sector Assessment Program (FSAP) more than a de cade ago, IMF staff has conducted
stress tests of banking sectors in over 120 countries, typically in close collaboration with country authorities. Stress testing is
also playing an increasingly important role in the IMF’s multilateral surveillance, through the analysis in our Global Financial
Stability Report. Separately, member countries are increasingly requesting IMF technical assistance in stress testing as they de-
velop their own expertise in this area. As a result, our staff has amassed a wealth of hands- on experience with stress testing
techniques and their practical application.
Th is book represents a compendium of stress testing methods, models, and tools developed or adapted by IMF staff over the
years. Almost all the methods and models that are included in this volume have, at one time or another, been applied in our
surveillance of, or our technical assistance to, member countries. To guide users, each chapter off ers a summary describing the
application of a method or model, its strengths and weaknesses, and the data requirements. Where available, the stress testing
tools or program codes are also provided for wider public use.
Although I trust that this volume will provide a valuable resource for policymakers, supervisors, academics, and private sec-
tor participants alike, caveats still apply. Th e crisis has underscored that stress tests, irrespective of their level of sophistication,
are not fail-s afe, stand-a lone diagnostic tools. Assessments of the soundness of any fi nancial system cannot and should not be
based solely on a “model” and must be complemented by other quantitative analyses, qualitative information, and, most impor-
tant, expert judgment. Especially in light of evolving market practices, risks, and regulatory requirements, stress testing will
necessarily continue to be art rather than science.
IMF staff is continually working to strengthen the analytical underpinnings of its stress testing, in ways that will help bolster
its consistency and comparability and hence its credibility. Key areas of focus include extending the analysis to better cover
nonbank fi nancial institutions and infrastructures; to take account of spillovers between institutions and across borders; to con-
sider the interaction between liquidity and solvency risks; and to address data gaps. In addition, IMF staff is developing the policy-
related aspects of stress testing, namely, “best practice” principles, concepts, and frameworks, to complement and strengthen
the application of the models. Th ese eff orts represent a challenging and exciting part of the IMF’s broader support of global
eff orts to improve fi nancial surveillance and promote sound macroprudential frameworks.
José Viñals
Financial Counsellor and Director
Monetary and Capital Markets Department
International Monetary Fund
©International Monetary Fund. Not for Redistribution