Category Financial Sector Assessment

This appendix complements chapter 2 and provides some additional guidance on the sort of quantitative data that should be collected to facilitate the analysis of different aspects of financial stability and of financial structure and development. The precise scope and content of data needed will be country specific to reflect its structural and institutional circumstances. Nevertheless, the appendix seeks to present a generally useful set of indica­tors and tabular formats and to present the sort of additional indicators that could be use­ful to capture differences in financial structure and in the state of financial development. The sequence in which the questionnaire—or list of data needed—is presented reflects the organization and coverage of the Handbook...

The fully unified model is particularly relevant when regulated entities are increasingly consolidating their activities and turning into conglomerates with centralized risk man­agement. Several arguments might favor the creation of a single unified agency for pru­dential regulation and supervision. Those arguments are as follows:

There may be economies of scale within regulatory agencies (particularly with respect to skill requirements and recruitment of staff members with appropriate skills and qualifications). If so, the smaller the number of agencies, the lower the institutional costs should be. A single regulator might be more efficient because of shared resources and, in particular, shared information technology systems and support services...

In several countries, government guarantee funds have been established to ensure DC private pension plans. The goal of such guarantees is to reduce an individual’s exposure to

investment and other risks associated with private plans and to diversify the risk of pen­sion fund failures among the general population of pension plans. In developing countries, especially in Latin America where they have sprouted, government guarantee schemes have helped to ease the transition from government sponsored DB plans to privately run DC plans. It is expected that guarantee funds will grow in importance as more countries shift to greater emphasis on private plans.

Government pension guarantees, as illustrated by the practices in the Latin American region, have commonly been of two forms:

• A guarant...

This technical note is intended to answer some of the questions that may arise as part of the process of stress testing a financial system. The note is structured as follows: Section D.1 begins with a discussion of stress testing in a financial system context that highlights some of the differences between stress testing that is designed to identify systemic weak­nesses and stress testing within individual portfolios. Section D.2 provides an overview of the process itself—from identifying vulnerabilities, to constructing scenarios, to interpret­ing the results. Section D.3 shows some examples of stress-testing calculations. Section D.4 draws on experience in conducting stress testing as part of the Financial Sector Assessment Program (FSAP).

D.1 Overview of Stress Testing1

A stress tes...

Banking authorities have an informational advantage and are, thus, better placed than creditors to assess a bank’s true situation and to detect insolvency at an early stage. It is, therefore, generally accepted that the supervisory authority must have the power to initi­ate insolvency proceedings against a bank.8

Many jurisdictions go further and grant to their supervisors exclusive competence to commence proceedings. Two justifications are usually put forward in support of this approach: First, the declaration of a bank’s insolvency may have systemic implications, which the bank’s creditors would fail to take into account. Second, the decentralized initiation of proceedings might allow frivolous or malicious creditors to initiate proceed­ings against solvent banks...

Duration is a key indicator for the measurement of the direct interest rate risk. The prin­cipal usefulness of duration stems from the fact that it approximates the elasticity of the market values of assets and liabilities to the respective rates of return,15

&MrA) _-РлАгл AA(r, ) _ – D, Ar, A(rA) (! + /•„)’ A(rL) (1 + rJ

where A(rA) and L(rL) are market values of assets and liabilities of a banking system, and where rA and rL are annual interest rates on assets and liabilities. This feature of dura­tion can be used to summarize the effect of changes in interest rates on banks’ capital. In particular, we can define capital as A(rA) – L(rL), and can express it as a ratio to risk weighted assets...