Back Matter

Appendix I. Preliminary Risk Assessment Matrix

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Appendix II. Stress Test Matrix (STeM) for Solvency, Liquidity, and Contagion Risks

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Source: IMF staff.

Hardy, D. C., and Schmieder, C. Rules of Thumb for Bank Solvency Stress Testing. IMF Working Paper. November 2013.

References

  • BCBS (2013). The Liquidity Coverage Ratio and liquidity risk monitoring tools. Basel Committee on Banking Supervision. Bank for International Settlements. January 2013.

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  • BCBS (2014). Basel III: the net stable funding ratio. Basel Committee on Banking Supervision. Bank for International Settlements. October 2014.

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  • Espinosa-Vega, M. and J. Solé, 2010, Cross-border Financial Surveillance: A Network Perspective, IMF Working Paper 105.

  • Hardy, D.C., and Schmeider, C. (2013). Rules of Thumb for Bank Solvency Stress Testing. IMF Working Paper WP/13/232.

1

The NPL ratios of four banks have been excluded from the calculation of the minimum and maximum values, due to uncertainties around provisioning and assets quality reporting.

2

With FDI amounting to 11.4 percent of GDP in 2014, it is an important contributing factor to economic output. It has also exhibited significant variation historically. However, as net FDI actually increased during 2009 and 2012 it is difficult to point to a particular numerical link between the scenarios and FDI developments.

3

Three-month Euribor is used as the measure of the “risk-free” interest rate.

4

Explanatory variables were: a proxy of real GDP annual growth, actual annual GDP growth spline-transformed to a quarterly frequency, nominal GDP annual growth, CPI yearly inflation, unemployment rate, industrial production annual growth, credit to GDP ratio, quarterly equity index changes, foreign direct investment to GDP, EUR/USD exchange rate quarterly changes, investment to GDP ratio, bank-specific lending interest rates, four-quarter volatility of bank-specific lending interest rates, quarterly changes of real estate index and annual growth in gross wages. See further information in Table 7.

5

Daniel C. Hardy and Christian Schmieder (2013). Rules of Thumb for Bank Solvency Stress Testing. IMF Working Paper WP/13/232.

6

A loss-given default rate of 60 percent is the average for low-income markets and emerging markets, according to Hardy and Schmeider (2013). It is also in the range of provisioning rates for regulatory NPL categories in Montenegro (40 percent for category C, 75 percent for category D and 100 percent for category E).

7

CBM projections and projections in recent FSAPs are not disclosed here due to confidentiality.

8

The FSAP team also conducted a loan migration analysis based on data on exposure amounts by loan quality categories A–E and the migration rates assumed by CBM in the Financial Stability Report. The projected NPL ratios tended to undershoot recent average projections in peer country FSAPs. A lack of data substantiating the assumptions underlying the assumed migration rates undermined the reliability of the analysis.

9

Public sector exposures include both sovereign bonds and loans to the public sector.

10

Operational losses are due to events such as internal and external fraud; business disruptions; business disruption and system failures; damage to physical assets; and execution, delivery, and process management.

11

Adjustments for outflows were made assuming an initially assumed average run-off rate of 7.5 percent of deposits.

12

Adjustments for outflows were made assuming an initially assumed average weight of 90 percent of deposits.

Montenegro: Financial Sector Assessment Program-Banking Sector Stress Testing-Technical Note
Author: International Monetary Fund. Monetary and Capital Markets Department