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Business and Economics > Banks and Banking

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Cover IMF Working Papers
Sandcastles and Financial Systems: A Sandpile Metaphor
Francesco Luna
and
Luisa Zanforlin
Social welfare costs from bank resolution, including contagion and moral hazard, are often thought to be minimized when supervisors can direct the merger of a failing bank with a sound, healthy one. However, social losses may become even larger if the absorbing institutions fail themselves. We ask whether social welfare losses are indeed lower when supervisors intervene rather than not. We use the sand pile/Abelian model as a metaphor to model financial losses which, as sand grains that fall onto a pile, eventually lead to a slide/failure. When capital in the system is insufficient to absorb the failing institution there will be welfare losses. Results suggest that, over the longer-term, social costs are lower when supervisors manage mergers. Additionally, financial networks that have a structure that minimizes social losses also minimize crises frequency. However, the bank employed resolution strategy will determine which financial network structures are associated with the minimum average loss per bankruptcy event.
Keywords:
Applied Abelian model; Banking; Financial Networks; Financial Economics; Banking Crisis; Bankrupcy; Bank Resolution; Selforganized Criticality; Bank Regulation and Supervision; welfare loss; resolution strategy; loss distribution; bank resolution regime supervisor; banks fail; shareholder bank; Distressed institutions; Commercial banks; Crisis resolution; Global
Cover IMF Staff Country Reports
Euro Area Policies: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper highlights quantitative tightening (QT) by the European Central Bank (ECB). It uses evidence from the literature on the impact of central bank bond purchases and sales on bond yields, and the monetary policy stance, to outline a roadmap for reducing the Euro system’s bond holdings. The current tightening cycle provides an opportunity to revisit the ECB’s balance sheet policy. With inflation running above target, the monetary accommodation provided by the ECB’s bond holding is no longer necessary. The current tightening cycle provides an opportunity to revisit the ECB’s balance sheet policy. With inflation running above target, the monetary accommodation provided by the ECB’s bond holding is no longer necessary. The paper concludes that the ECB’s short term policy rates should be the main choice for adapting the monetary policy stance to changing circumstances and QT should proceed in a gradual, predictable manner as outlined by the ECB.
Keywords:
ECB Policy rate; ECB balance sheet; app portfolio; C. Policy consideration; bond supply net of ECB; Financial statements; Unconventional monetary policies; Central bank policy rate; Monetary stance; Securities
Cover IMF Working Papers
Calibrating Macroprudential Policies in Europe Amid Rising Housing Market Vulnerability
Ms. Laura Valderrama
Housing market developments are in the spotlight in Europe. Over-stretched valuations amid tightening financial conditions and a cost-of-living crisis have increased risks of a sustained downturn and exposed challenging trade-offs for macroprudential policy between ensuring financial system resilience and smoothing the macro-financial cycle. Against this backdrop, this paper provides detailed considerations regarding how to (re)set macroprudential policy tools in response to housing-related systemic risk in Europe, providing design solutions to avoid unintended consequences during a tightening phase, and navigating the trade-offs between managing the build-up of vulnerabilities and the macro-financial cycle in a downturn. It also proposes a novel framework to measure the effectiveness of tools and avoid overlaps by quantifying the risks addressed by different macroprudential instruments. Finally, it introduces a taxonomy allowing to assess a country’s macroprudential stance and whether adjustments to current policy settings are warranted—such as the relaxation of capital-based tools and possibly some borrower-based measures in the event of a more severe downturn.
Keywords:
Housing markets; household vulnerability; income distribution; economic cycle; financial stability; macroprudential policy.; Macroprudential policy; housing market vulnerability; Policy tool; calibrating Macroprudential policies in Europe amide; Macroprudential Policy stance framework; Countercyclical capital buffers; Mortgages; Housing prices; Credit; Europe; Global
Cover IMF Staff Country Reports
Austria: Publication of Financial Sector Assessment Program Documentation-Technical Note on Banking Oversight
International Monetary Fund. Monetary and Capital Markets Department
This paper on Austria includes a targeted review of banking regulation and supervision, with a focus on topics related to the supervision of less significant institutions. The national transposition and implementation of EU directives and regulations has significantly closed some of the gaps identified in 2013. Oversight of bank loan portfolios was strengthened by guidance from the European Central Bank and European Banking Authority (EBA) concerning nonperforming loans and forborne exposures, and by EU regulation. As noted in the previous Basel Core Principles assessment, the Austrian Banking Act (BWG) and regulations do not establish an adequate framework for monitoring and addressing transactions with related parties; and the BWG does not require ex-ante approval for acquiring qualifying holdings in undertakings outside the financial sector. Although the BWG amendments strengthened the duties and responsibilities of credit institutions’ supervisory boards, operationally the role may be made more robust by increasing interaction between the supervisory board and banking supervisors.
Keywords:
ISCR; CR; OeNB; bank; FMA regulation; FMA governance; FMA issues circular; FMA power; FMA place; FMA's view; Bank supervision; Financial Sector Assessment Program; External balance assessment (EBA); Credit risk; Credit; Eastern Europe; Global; Nonperforming loans
Cover IMF Staff Country Reports
Austria: Publication of Financial Sector Assessment Program Documentation-Technical Note on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note sets out the findings and recommendations made in the context of the 2019 Financial Sector Assessment Program for Austria in the areas of Anti-Money Laundering/Combating the Financing of Terrorism. It provides a targeted review of Austria’s progress in addressing the Money Laundering/Terrorism Financing vulnerabilities. Several initiatives, the amendments introduced to the Financial Markets Anti-Money Laundering Act, the Beneficial Owners Register Act, and other sectoral laws have led to significant enhancements of the legal and regulatory framework which resulted in a number of upgrades on technical compliance ratings by the Financial Action Task Force in the context of the two follow-up reports. The authorities took steps to transpose the Fourth and the Fifth Anti-Money Laundering Directives into national legislation. Steps have been taken to improve the legal and regulatory framework that applies to lawyers, notaries and tax advisors, and other Designated Non-Financial Business and Professions, but there is room for enhancing implementation. The authorities have recently adopted a comprehensive set of reforms to enhance entity transparency, including through the establishment of a Register of Beneficial Ownership.
Keywords:
ISCR; CR; TF risk; authority; company; AMLC; country; customer; CFT supervision; CFT obligation; CFT framework; CFT regime; risk profile; TF scandal; Anti-money laundering and combating the financing of terrorism (AML/CFT); Legal support in revenue administration; Virtual currencies; Commercial banks; Financial Sector Assessment Program; Eastern Europe; Southern Europe; Europe
Cover IMF Staff Country Reports
Austria: Publication of Financial Sector Assessment Program Documentation-Technical Note on Insurance Sector—Regulation, Supervision, Recovery, and Resolution Regime Prospects
International Monetary Fund. Monetary and Capital Markets Department
This review provides an update on the Austrian insurance sector and an analysis of certain key aspects of the regulatory and supervisory regime. The note analyzes regulation and supervision in relation to key issues identified in previous Financial Sector Assessment Programs (FSAP), as well as material changes since the last FSAP. This note also covers the current situation and potential changes in the crisis management and early intervention framework of the insurance sector. It focuses on issues relevant to a long-standing policyholder protection mechanism, early intervention powers—existing and under discussion—and crisis management and resolution arrangements for insurance companies and groups. The analysis recommends that proper implementation of Solvency II needs ongoing validation and scrutiny by regulators, which could be at risk if supervisory resources with skills and expertise are not retained. Higher legal, reputational, and conduct risks are posing additional pressures to the life insurance sector. Market conduct supervision should be enhanced, with active use of enforcement powers in addition to the insights that studies launched by the government will provide.
Keywords:
ISCR; CR; risk assessment; coverage ratio; FMA resource; enforcement case; FMA discussion; FMA staff; FMA supervisor; information exchange template; insurance assets; FMA stress test; FMA contribution; FMA calculation; FMA enforcement case; FMA official; conduct risk; Insurance companies; Insurance; Solvency; Stress testing; Bank resolution framework; Global
Cover IMF Staff Country Reports
Austria: Publication of Financial Sector Assessment Program Documentation-Technical Note on Bank Resolution and Crisis Management
International Monetary Fund. Monetary and Capital Markets Department
This technical note on Austria focuses on bank resolution and crisis management. This note assesses and makes recommendations regarding bank resolution and crisis management arrangements. The scope of the assessment includes the institutional arrangements for recovery, resolution, and crisis management; the supervision of banks’ recovery plans; the legal regime for bank bankruptcy and resolution; resolution planning by the authorities and addressing impediments to resolution; assuring funding to support resolution; the two deposit guarantee schemes; and the government authorities’ collective preparedness to deal with financial crisis. Recovery and resolution planning are well advanced. Key impediments to resolution have been identified and are being addressed, yet adequate means to ensure enough funding in resolution remains to be determined. The legal framework is sound, although additional flexibility could be provided in the bankruptcy regime. The authorities’ collective contingency planning for financial crisis and testing of plans should be intensified.
Keywords:
ISCR; CR; resolution plan; savings bank; government support arrangement; lead bank; stabilization measure; FMA staff; government stabilization tool; collective preparedness; bankruptcy regime; government stabilization measure; Bank resolution framework; Bank resolution; Bridge bank; Contingency planning; Crisis management; Global
Cover IMF Staff Country Reports
Austria: Publication of Financial Sector Assessment Program Documentation-Technical Note on Macroprudential Policy Framework and Tools
International Monetary Fund. Monetary and Capital Markets Department
This technical note assesses strengths and weaknesses of the macroprudential policy framework in Austria and provides policy recommendations. Financial sector resilience in Austria has improved significantly since the global financial crisis, and the macroprudential policy framework has been formalized. The institutional framework is appropriate for conducting macroprudential policy effectively, but it could be strengthened in some areas. However, some structural vulnerabilities to financial stability remain and cyclical risks are on the rise. Banks’ low efficiency and the resulting low profitability of domestic operations continues to be a key concern, especially given the fact that the Central Europe and South Eastern Europe region accounts for over 40 percent of Austrian banks' consolidated profits. The framework contains a clear mandate, well-defined objectives, and provides enough powers to the Financial Market Stability Board. Broad-based vulnerabilities remain contained but build-up of risks in the real estate sector warrants further action. The framework for addressing structural vulnerabilities is sophisticated, however, further improvements could be considered.
Keywords:
ISCR; CR; CESEE region; FMSB meeting; CESEE exposure; FMSB secretariat; FMA regulation; FMSB recommendation; investment funds; Macroprudential policy; Housing prices; Financial sector risk; Financial sector stability; Loans; Europe; Global; Central and Eastern Europe; Eastern Europe; North America
Cover IMF Staff Country Reports
Austria: Publication of Financial Sector Assessment Program Documentation-Technical Note on Financial Stability Analysis, Stress Testing, and Interconnectedness
International Monetary Fund. Monetary and Capital Markets Department
This technical note on Austria presents the Financial Stability analysis, stress testing, and interconnectedness. Austria’s banking sector presents unique structural vulnerabilities. Private credit growth has supported the cyclical boom without jeopardizing household and corporate indebtedness. Profits of Austrian subsidiaries in Central, Eastern, and South-eastern Europe have increased recently; however, the cycle is turning and the ability of the sector to maintain a solid net interest margin may be further challenged. The Austrian authorities have targeted vulnerabilities related to interconnectedness by imposing Other Systemically Important Institution buffers also at the unconsolidated level. Institutional cooperation arrangements are shown to act as a shock absorber for idiosyncratic shocks, but holdings among participating members of respective IPSs may lead to substantial inward stability risks in a systemic event. Under favorable economic conditions inverse ownership contributes strongly to their capital generation by allowing partial redistribution of profits higher tier banks in the Raiffeisen sector earn on their more profitable international business.
Keywords:
ISCR; CR; cash flow; OSII bank; equity stake; balance sheet; bank default; funding rollover; interest rate; sensitivity analysis; credit risk; financial system; liquidity profile; cash-flow liquidity analysis toolkit; fair value; banks' liquidity profile; Stress testing; Commercial banks; Liquidity; Solvency stress testing; Financial Sector Assessment Program; Europe; Global
Cover Departmental Papers
Stress Testing at the IMF
Mr. Tobias Adrian
,
Mr. James Morsink
, and
Miss Liliana B Schumacher
This paper explains specifics of stress testing at the IMF. After a brief section on the evolution of stress tests at the IMF, the paper presents the key steps of an IMF staff stress test. They are followed by a discussion on how IMF staff uses stress tests results for policy advice. The paper concludes by identifying remaining challenges to make stress tests more useful for the monitoring of financial stability and an overview of IMF staff work program in that direction. Stress tests help assess the resilience of financial systems in IMF member countries and underpin policy advice to preserve or restore financial stability. This assessment and advice are mainly provided through the Financial Sector Assessment Program (FSAP). IMF staff also provide technical assistance in stress testing to many its member countries. An IMF macroprudential stress test is a methodology to assess financial vulnerabilities that can trigger systemic risk and the need of systemwide mitigating measures. The definition of systemic risk as used by the IMF is relevant to understanding the role of its stress tests as tools for financial surveillance and the IMF’s current work program. IMF stress tests primarily apply to depository intermediaries, and, systemically important banks.
Keywords:
DPPP; DP; bank; IMF staff; stress tests; bank exposure; cash flow; funding cost; share price; defaults affect bank asset value; IMF solvency stress tests; optimization process; bank capital; IMF team; counterbalancing capacity; Stress testing; Financial Sector Assessment Program; Systemic risk; Solvency; Solvency stress testing; Global; Financial sector stability; risk amplification mechanism; IMF stress tests; solvency factor; IMF Library