Appendix. Stress Testing in European FSAPs22
Avesani, Renzo, Kexue Liu, Alin Mirestean, and Jean Salvati, 2006, “Review and Implementation of Credit Risk Models of the Financial Sector Assessment Program,” IMF Working Papers 06/134 (Washington: International Monetary Fund).
Aspachs-Bracons, Oriol, and others, 2006, “Searching for a Metric for Financial Stability,” Financial Markets Group, London School of Economics, Special Paper Series, 167.
Goodhart, Charles, Boris Hofmann, and Miguel Segoviano, 2008a, “Bank Regulation and Macroeconomic Fluctuations”, in Handbook of European Financial Markets and Institutions, edited by X. Freixas, P. Hartmann, and C. Mayer, pp. 690–720.
Blaschke, Winfrid, Matthew T. Jones, Giovanni Majnoni, and Soledad Martinez Peria, 2001, “Stress Testing of Financial Systems: An Overview of Issues, Methodologies, and FSAP Experiences,” IMF Working Papers 01/88 (Washington: International Monetary Fund).
Bunn, Philip, Alastair Cunningham, and Mathias Drehmann, 2005, “Stress Testing as a Tool for Assessing Systemic Risks,” Bank of England Financial Stability Review, June, pp. 116–26.
Chan-Lau, Jorge A., Srobona Mitra, and Li Lian Ong, 2007, “Contagion Risk in the International Banking System and Implications for London as a Global Financial Center,” IMF Working Papers 07/74 (Washington: International Monetary Fund).
Čihák, Martin, 2006, “How Do Central Banks Write on Financial Stability?” IMF Working Papers 06/163 (Washington: International Monetary Fund).
Čihák, Martin, 2007, “Introduction to Applied Stress Testing,” IMF, Working Papers 07/59 (Washington: International Monetary Fund).
Čihák, Martin, and Li Lian Ong, 2007, “Estimating Spillover Risk Among Large EU Banks,” IMF, Working Papers 07/267 (Washington: International Monetary Fund).
Committee on the Global Financial System, 2000, “Stress Testing by Large Financial Institutions: Current Practice and Aggregation Issues.”
Drehman, M., 2005, “A Market Based Macro Stress Test for the Corporate Credit Exposures of UK Banks,” Paper presented at the Basel Committee Workshop on Banking and Financial Stability, Vienna, April, www.bis.org/bcbs/events.
Gonzalez-Hermosillo, Brenda, and Miguel Segoviano, 2008, “Global Financial Stability and Macro-Financial Linkages,” IMF, Working Papers (forthcoming).
Gray, Dale, and James P. Walsh, 2008, “Model for Stress-testing with a Contingent Claims Model of the Chilean Banking System,” IMF, Working Papers 08/89 (Washington: International Monetary Fund).
Jones, Matthew T., Paul Hilbers, and Graham Slack, 2004, “Stress Testing Financial Systems: What to Do When the Governor Calls,” IMF Working Papers 04/127 (Washington: International Monetary Fund).
Segoviano, Miguel, (2006a), “The Conditional Probability of Default Methodology,” Financial Markets Group, London School of Economics, Discussion Papers, no. 558.
Segoviano, Miguel, (2006b), “The Consistent Information Multivariate Density Optimizing Methodology,” Financial Markets Group, London School of Economics, Discussion Papers, no. 557.
Segoviano, Miguel, (2008), “CIMDO-Copula: Robust Estimation of Default Dependence with Data Restrictions,” IMF Working Papers (forthcoming).
Segoviano, Miguel, Charles Goodhart, and Boris Hofmann, 2006, “Default, Credit Growth, and Asset Prices,” IMF Working Papers 06/223 (Washington: International Monetary Fund).
Segoviano, Miguel, and Pablo Basurto, 2006, “Portfolio Credit Risk and Macroeconomic Shocks: Applications to Stress Testing Under Data-Restricted Environments,” IMF Working Papers 06/283 (Washington: International Monetary Fund).
International Monetary Fund. The views expressed in this working paper are those of the authors and do not necessarily represent those of the IMF or IMF policy.
This paper will also be published as a chapter in a comprehensive book on stress testing, edited by the Bank of Italy and published by the Cambridge University Press.
Under Article IV of the IMF Articles of Agreement, member countries undertake to collaborate to promote the stability of the global system of exchange rates and, in particular, commit to run their domestic and external policies in keeping with an agreed code of conduct. Article IV also sets forth an obligation for the IMF to “oversee the compliance of each member with its obligations under Article IV,” which it does through (typically annual) Article IV consultations and reports.
The first Expert Forum took place in May 2006 at IMF headquarters; the second in November 2007 hosted by the Nederlandsche Bank; and the next meeting is scheduled for May 2009 and will be hosted by the Deutsche Bundesbank in Berlin. The IMF also participates in external working groups and programs that are active in this area, such as the Basel Committee for Banking Supervision, the Electronic Platform on Stress Testing of the Deutsche Bundesbank, and the Regulation and Financial Stability Program of the Financial Markets Group Research Centre at the London School of Economics.
See the appendix for a summary of practices for FSAP stress testing in European countries. The focus is on Europe as the region with most extensive FSAP coverage to date.
Financial institutions use the concepts of bottom-up and top-down stress tests in yet another way. A top-down test typically entails a common scenario or inputs applied consistently across portfolios and business units. Bottom-up tests are carried out independently by the various business or risk management units and then aggregated at the central risk management level.
That is, the same shocks are applied to a given set of institutions covered within a given stress test.
Appendix Table 1 lists the European countries whose FSAPs are covered in this survey. The survey focuses on European FSAPs, as Europe is the continent with the most complete coverage of FSAPs.
Household and corporate portfolios are sometimes modeled separately or, data permitting, the corporate sector is disaggregated further.
See Segoviano and Padilla (2006) and Segoviano and Goodhart (2008). The framework also allows to calculate a stability measure of the banking system and to measure liquidity risk and counterparty risk.
This would examine correlations between extreme negative movements in institutions’ distances to default, and result in an inter-institutional matrix that might be able to be used in a fashion analogous to an interbank exposures matrix. For a recent EVT analysis, though not linked to a stress test, see Chan-Lau et al. (2007) and Čihák and Ong (2007).