Chapter 23. Vulnerabilities of Household and Corporate Balance Sheets in the United Kingdom and Risks for the Financial Sector
Author:
Marta Ruiz-Arranz
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Language:
English
Print Publication Date:
23 Dec 2014
Keywords:
BOOK; IMF staff; balance sheet; BNP Paribas; credit growth; shortfall exercise; Stress testing; Loans; Credit risk; Nonperforming loans; Commercial banks; Global; Europe; Eastern Europe; Southern Europe; Africa

Abstract

This chapter estimates the impact of macroeconomic shocks to household and corporate balance sheets on banks. Two separate methods are employed. First, contingent claims analysis is used to assess the near-term prospects for the U.K. corporate sector. Specifically, this method attempts to determine the extent of the risk of corporate sector defaults and the most vulnerable sectors, as well as the size of expected losses from defaults. Second, a measure of debt at risk is used to quantify the size of the debt overhang in the private sector (corporates and households) and potential losses in the face of several plausible macroeconomic shocks. The results indicate that losses from defaults are expected to be limited, except for the corporate real estate sector. Separately, although U.K. households remain heavily indebted and vulnerable to shocks, the potential impact on banks appears to be manageable.

Contributor Notes

Previously published as IMF Country Report No. 11/229 (IMF, 2011b). The author would like to thank counterparts at the Bank of England, HM Treasury, and the Financial Services Authority for helpful comments.
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Cover A Guide to IMF Stress Testing
A Guide to IMF Stress Testing
Methods and Models
Author:
Ms. Li L Ong
ISBN:
9781484368589
Publication Date:
23 Dec 2014
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781484368589.071
Pages:
612
Front Matter
Chapter 1. Stress Testing at the International Monetary Fund: Methods and Models
Part I: The Accounting-Based Approach
Section A. The Balance Sheet–Based Approach
Chapter 2. Introduction to the Balance Sheet–Based Approach to Stress Testing
Chapter 3. Stress Tester: A Toolkit for Bank-by-Bank Analysis with Accounting Data
Chapter 4. Into the Great Unknown: Stress Testing with Weak Data
Chapter 5. Next-Generation Applied Solvency Stress Testing
Chapter 6. Of Runes and Sagas: Perspectives on Liquidity Stress Testing Using an Iceland Example
Chapter 7. Next-Generation Systemwide Liquidity Stress Testing
Chapter 8. Systemic Bank Risk in Brazil: A Comprehensive Simulation of Correlated Market, Credit, Sovereign, and Interbank Risks
Chapter 9. Modeling Correlated Systemic Bank Liquidity Risks
Chapter 10. Review and Implementation of Credit Risk Models
Chapter 11. Bankers without Borders? Implications of Ring-Fencing for European Cross-Border Banks
Chapter 12. Conducting Stress Tests of Defined Benefit Pension Plans
Section B. The Network Analysis Approach
Part II: The Market Price-Based Approach
Section A. The Equity Indicators–Based Approach
Section B. The Extreme Value Theory Approach
Section C. The Contingent Claims Analysis Approach
Part III: The Macro-Financial Approach
Back Matter