Category Financial Sector Assessment

Constructing Scenarios—Use of Macroeconomic Models

Once the key questions or main vulnerabilities of interest have been identified, the next step is to construct a scenario that will form the basis of the stress test. This phase of the process involves an examination of the available data and models that can be used to understand the behavior of the system with respect to the main vulnerabilities. Using those data, one can construct a scenario in the context of some overall macroeconomic framework or model, depending on the complexity of the system and the availability of a suitable model.

The objective of using an explicit macroeconomic model is to link a particular set of shocks to key macrovariables and financial variables in a consistent and forward-looking framework...

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In this report, official administration of banks refers to those forms of insolvency pro­ceedings in which an official authority (e. g., a court-appointed administrator, a banking authority, an administrator appointed by a banking authority) assumes direct managerial control of an insolvent bank, with a view to (a) protecting its assets, (b) assessing its true financial condition, and (c) then either conducting all the necessary restructuring operations or placing the bank in liquidation. Official administration continues until the institution has been restored to soundness or placed in liquidation.

G.4.2 Basic Principles

An effective framework for official administration needs to be built on a number of basic premises, including the following:

• Speed: The threat of bank insolvency needs...

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Second Round Effects

Stress tests can be improved by including second-round effects. In particular, most stress tests assume no realignments of portfolios in response to risk factors. Stress tests are typi­cally applied to balance sheets at a point in time or in conjunction with a forecast over a specific horizon, and the effect is calculated as if the shock were “marked-to-market” or were valued at market prices. This approach is valid if the time horizon is short or if changes in the portfolios take time to implement. For example, assuming only a limited behavioral response in a large loan portfolio over a 1-month horizon may be a reasonable assumption, because it is often difficult to restructure a portfolio in a short time without incurring losses from “fire-sale” prices.22

Such an assumption may ...

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European Central Bank Monetary Statistics

The European Central Bank (ECB) publishes—as part of its monetary statistics—aggre­gated and consolidated balance sheets of the euro area monetary financial institutions, as well as details on national aggregated balance sheets of the euro area monetary insti­tutions. Recently published series contain information on the cross-border positions of monetary financial institutions residing in the euro area vis-a-vis all financial institutions residing within and outside the euro area...

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Role of the Central Bank

A key issue in any institutional structure of regulatory and supervisory agencies is the posi­tion and role of the central bank. In the vast majority of countries, the central bank has historically been responsible for both the systemic stability and the prudential regulation and supervision of banks. In only a very small minority of cases has it also been respon­sible for the supervision of non-bank financial institutions. Even so, there are several alternative models for the role of the central bank, depending on whether it is involved in monitoring the payments system, providing emergency liquidity to the markets, super­vising banks, managing deposit insurance, or playing a role in providing the safety net or crisis resolution.

Nevertheless, almost universally, the central bank is al...

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