Category Financial Sector Assessment

Identifying Vulnerabilities

The first stage in the stress-testing process is the identification of the main vulnerabilities. Narrowing the focus of the exercise permits a more refined analysis, because it is unrealis­tic to attempt to stress every possible risk factor for a portfolio or system. Focusing on the weak points in a financial system enables the assessor to tailor the stress-testing exercise more effectively and thus permits a richer understanding of inherent vulnerabilities and a more effective use of time and resources.

Isolating the key vulnerabilities to stress test is an iterative process that involves both qualitative and quantitative elements...

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Rights of Shareholders and Creditors in the Context of Bank Insolvency

The survival of shareholders’ governance rights can significantly complicate the search for an effective bank resolution. To avoid this eventuality, a sound bank insolvency regime can transfer control over the institution to the official administrator, in particular, through the suspension of the governance rights of shareholders. Where bank insolvency proceedings take place within the general framework of corporate insolvency law, the possibility of appropriate exceptions should be considered.

When official administration and liquidation are organized as distinct legal proceed­ings that are subject to separate rules, the commencement of liquidation will imply that the survival of the bank is no longer possible and will generally result in the outright ter­mination of shareholders’ gover...

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Other Risks

Stress tests can be performed on other risks, including liquidity risk, commodity risk, or equity price risk. Asset liquidity risk refers to the inability to conduct a transaction at current market prices because of the size of the transaction. Funding liquidity risk refers to the inability to access sufficient funds to meet payment obligations in a timely manner. Liquidity risk can be assessed by imposing a “haircut” on the liquid assets of an institution and by examining the effect on the liquid assets ratio (for asset liquidity risk). A conser­vative scenario would be to assume that only the cash held by banks (in domestic and foreign currency), as well as the reserve requirements, were always liquid.

The next step would be to add to the category of liquid assets those deposits tha...

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Assessment of Pension Schemes from a Financial Sector Perspective

A pension plan is a long-term financial contract that promises to pay a retiring worker a sum of money intended to support old age consumption (Mitchell 2002, p. 2). Pension plans are generally classified as either a defined contribution (DC) plan or a defined benefit (DB) plan. Those two plans have significantly different characteristics. In a DC plan, the sponsor promises to periodically deposit a specified contribution into the plan (e. g., per pay period), which is then invested in capital market instruments of various risk levels. An individual’s total pension is based on amount contributed, length of employ­ment, and investment return...

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OECD Databases

The OECD Bank Profitability Statistics Database has three main components: (a) income statement and balance sheet statistics, (b) structure of financial system, and (c) classifica­tion of banks assets and liabilities.

Income statement and balance sheet statistics provide information on income state­ments, balance sheets, and capital adequacy by banking groups. Data relate to individual banking groups as defined by country (e. g., Germany: all banks, commercial banks, large commercial banks, savings banks, cooperative banks, regional giro institutions, regional institutions of cooperative banks). Data are provided in national currency and include the following:

• Years covered: 1979 onward, annual, latest update for 2001

• Countries covered: Australia, Austria, Belgium, Canada, the Czec...

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Internal Structure of Unified Supervisory Agencies

Given the arguments that have been outlined, the objective within a single agency must be to create an internal organizational structure that maximizes the potential advantages (e. g., cost efficiency, less regulatory arbitrage), while at the same time guarding against the potential hazards (e. g., heavy bureaucracy, lack of focus). Internal organization could reflect different institutional types or different functional lines. For instance, some super­visory activities (e. g., licensing, prudential control) could be established to cover all insti­tutional types. A number of variations are possible. Country experiences to date suggest that no one model for the internal organization of unified agencies has been notably more successful than any of the others.

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