Category Financial Sector Assessment

Stress Testing of Insurance Companies

Stress testing of insurance company balance sheets and income statements is not as well developed in financial stability analysis as in stress testing of banks. Insurance companies are generally considered to represent a lower level of systemic risk than banks, mainly because of the different character of their liabilities, which often have a longer duration than banks. However, distress in the insurance sector can have important systemic impli­cations, including through ownership relations with the banking sector and its effect on confidence in the financial sector as a whole.

Because insurance companies have a different balance-sheet structure compared to banks, stress tests of their balance sheets present unique challenges...

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Income and Household Security

Pensions provide a critical source of income security for workers in their retirement years. The pensions are often long term in nature (60 years or more). The significance of well – managed and well-regulated funds extends beyond the elderly to current workers, who contribute on the basis of an expected future revenue stream. In addition, the increasing transition from DB to DC and to hybrid plans, plus the decrease in state pensions, bears financially on the household sector, which is now more exposed to retirement risks (e. g., investment, market, longevity). Therefore, to date, much of pension fund regulation has focused on the protection of pensioner and employee rights.

Effective oversight in this regard is predicated on ensuring that individual investors have confidence that their s...

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Bank for International Settlements (BIS)

BIS publishes on its Web site the following databases that are of interest for financial sec­tor assessments: consolidated banking statistics, international banking statistics, securities statistics, derivatives statistics, and payment and settlement system statistics.

Consolidated banking statistics include consolidated data on foreign and international claims by maturity and sector and by nationality of reporting bank. The data cover the

following:

• Years covered: 1983 onward, quarterly frequency

• Countries covered: BIS reporting banks’ claims on all countries

International banking statistics include locational statistics on external positions of BIS reporting banks by sector and by currency. Their coverage is as follows:

• Years covered: 1977 onward, quarterly frequency

• Cou...

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Banking Resolution and Insolvency—Emerging World Bank and International Monetary Fund Guidelines

G.1 Bank Insolvency Framework: Objectives and Scope

G.1.1 Objectives

In early 2002, the World Bank and the International Monetary Fund (IMF) in coordina­tion with the Bank for International Settlements (BIS), Basel Committee on Banking Supervision (BCBS), Financial Stability Institute (FSI), Financial Stability Forum (FSF), and some regional financial institutions, launched the Global Bank Insolvency Initiative (GBII). Its main objectives are as follows:

• To identify the appropriate legal, institutional, and regulatory framework to address banks in distress (Bank Insolvency Framework)

• To progressively create an international consensus regarding the framework, including best practices and alternatives

• To design a methodology for the assessment of the countries’ framework and to un...

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Execution, Scope, and Coverage

The first question to consider in implementing a system-focused stress test is who crunches the numbers: the supervisory agency or central bank, or the institutions them­selves? Ideally, individual institutions should be as heavily involved in the process as possible—regardless of whether a top-down or bottom-up approach is used—because individual institutions will typically have the best access to data and knowledge of their own portfolios. For institutions with sophisticated risk management systems or significant international operations, most will have systems and stress-testing procedures in place as part of their internal risk monitoring processes...

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Key Objectives

The purpose of restructuring is to ensure the continuation of the bank’s business, in whole or in part, as an economic unit (“going concern”) on a financially sound basis. A country’s laws need to establish the objectives and basic principles to be followed by the authorities in restructuring a bank in the context of insolvency proceedings.

G.5.3 Basic Principles

Drawing on international experience and practices, certain principles for bank restructur­ing are outlined in the following paragraphs.

G.5.3.1 Limit Moral Hazard

In a sound and efficient financial system, only well-administered institutions should remain in business...

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