Basel Committee on Banking Supervision (2010). Guidance for national authorities operating the countercyclical capital buffer, December.
Drehmann, M., C. Borio and K. Tsatsaronis (2011). Anchoring countercyclical capital buffers: the role of credit aggregates, Bank for International Settlements Working Paper No. 355, Basel, Switzerland.
International Monetary Fund (2011). Global Financial Stability Report: Grappling with Crisis Legacies, Chapter 3: Toward Operationalizing Macroprudential Policies: When to Act? Washington D.C.
Jones M. T. and M. Karasulu (2006). The Korean Crisis: What Did We Know and When Did We Know It? What Stress Tests of the Corporate Sector Reveal, IMF Working Paper 06/114, Washington: International Monetary Fund.
Lindner P. and S. E. Jung (2014). Corporate Vulnerabilities in India and Banks’ Loan Performance, IMF Working Paper 14/232, Washington: International Monetary Fund.
Prepared by Sarwat Jahan and Peter Lindner.
Average real GDP growth was below 5 percent during the rapid credit expansion of 2015–2017, compared to the episode in 2010–2012, when real GDP growth averaged 8.5 percent.
Following two policy rates hikes in 2016 and a third one in March 2017, market lending interest rates increased by about 300 bps since 2016. However, CBSL relaxed monetary policy in April 2018 which may impact credit growth.
Credit to GDP gap is a widely used indicator for financial sector stress. Following the Bank for International Settlements methodology, a threshold of 10 percent or more signals a high potential of crisis for advanced and emerging markets (Basel Committee on Banking Supervision, 2010; Borio and Drehmann, 2009; and Drehmann et.al., 2011). Another warning threshold is the year on year change of 3 percent in the credit-to-GDP ratio (IMF, 2011).
The stress test is based on end-2016 balance sheet data for Sri Lanka’s licensed commercial banks, as reported by FITCH Connect (FC). It should be noted that the two banks exhibiting the most severe losses have significant exposure to residential mortgages, many of which are collateralized with borrowers’ balances in the EPF pension fund. For background on stress test methodology, see Jones and Karasulu (2006), and Lindner and Jung (2014).
NBFIs provide lending to the underbanked portion of the population and SMEs, providing mainly vehicle loans, leases, and to a limited degree mortgages.
However, in January 2018, the LTVs on certain environmentally friendly motor vehicles was raised to support their greater use.