Category Financial Sector Assessment

Stress Testing

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...

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Commencement of Bank Insolvency Proceedings

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...

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Interest Rate Risk

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

Подпись: (7)

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...

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Bank Liquidation

In liquidation, an insolvent bank is dissolved after a liquidator assumes legal control of its estate, collects and realizes its assets, and distributes the proceeds to creditors—in full or partial satisfaction of their claims—in accordance with the principle of equal (pari passu) treatment of similarly situated creditors and the applicable rules on priority. Liquidation will be appropriate if the bank’s restructuring does not appear feasible or if the restructur­ing involves the spinning off of the viable operations of the bank, thus leaving only its residual, nonviable part with the original legal entity. On the commencement of liquida­tion and until the final act of dissolution, the bank will continue to exist as a legal entity but will no longer be a going concern...

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Indicators of Access to Financial Services

Financial institutions

Number of branches, or other banking service outlets, for each bank, NBFI, and DFI and for each province (state and local jurisdictions)

Number of ATMs for each bank, NBFI, and DFI and for each province

Size distribution of loans for banks, NBFIs, and DFIs; similar distribution data for deposits

Number of employees for each bank, NBFI, and DFI and for each province


Percentages of households with transaction accounts, payment cards; total number of transaction accounts, payment cards in the system


Percentages of households with savings accounts; total number of savings and time deposit accounts

Allocation of fundsa

Percentage of households with residential mortgage; with other borrowings in last year (stock or flow)

Percentage of enterprises (includ...

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Case Against the Fully Unified Model

There is clear merit in the arguments stated in the case for a unified model, and there is a certain prima facie appeal to the concept of a unified prudential regulator. However, several reservations may be voiced about such an agency:

• One of the arguments in favor of a single prudential agency—that as financial firms have increasingly diversified, the traditional functional distinctions between institutions have been eroded—is not applicable in many countries. Although this lack of applicability is generally the case in industrial countries, it may not be true of all countries or even of all institutions in industrial countries. In very many countries, there remain—and will remain for the foreseeable future—major differ­ences among banks, securities firms, and insurance companies...

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