Chapter 34. The Real Effects of Financial Sector Risk
Author:
Alexander F. Tieman https://isni.org/isni/0000000404811396 International Monetary Fund

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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 magnitude of key effects on the real economy from financial sector stress. We focus on the short-term feedback effect from market-based indicators of financial sector risk to the real economy through the credit channel and estimate this effect on an economy-wide (macro) level, as well as on the level of individual large banks. Both estimates yield significant feedback effects of substantial magnitude. The estimates are consistent with other work in this area. Our results suggest that prudential supervision could be enhanced by taking into account the feedback effects of financial instability in the real economy. They also propose a way to integrate feedback effects into stress tests in order to improve realism and accuracy on macroeconomic stress scenarios, as well as a metric to interpret stress testing results.

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Contributor Notes

An abridged version of this chapter was previously published as IMF Working Paper 09/198 (Tieman and Maechler, 2009). The authors would like to thank Martin Čihák, Mark Swinburne, and seminar participants at the IMF and at the Third Bundesbank-IMF stress testing conference in Berlin for valuable 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