Front Matter Page
INTERNATIONAL MONETARY FUND
IMF Country Report No. 18/231
EURO AREA POLICIES
FINANCIAL SECTOR ASSESSMENT PROGRAM TECHNICAL NOTE—SYSTEMIC RISK ANALYSIS
July 2018
This Technical Note on Systemic Risk Analysis for the euro area was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in June 2018.
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Front Matter Page
INTERNATIONAL MONETARY FUND
EURO AREA POLICIES
FINANCIAL SECTOR ASSESSMENT PROGRAM
June 29, 2018
TECHNICAL NOTE
SYSTEMIC RISK ANALYSIS
Prepared By
Monetary and Capital Markets Department
This Technical Note was prepared by in the context of the Financial Sector Assessment Program for the euro area led by Daniel Hardy. It contains technical analysis and detailed information underpinning the FSAP’s findings and recommendations. Further information on the FSAP can be found at http://www.imf.org/external/np/fsap/fssa.aspx
CONTENTS
Glossary
EXECUTIVE SUMMARY
DETERMINANTS OF EURO AREA BANK PROFITABILITY
A. Introduction
B. Conceptual and Empirical Framework
C. Data, Key Trends, and Stylized Facts
D. Econometric Analysis
E. Conditional Profitability Distributions
F. Weakest Bank Profits in 2016—An Illustrative Exercise
G. Conclusions and Policy Implications
References
FIGURES
1. Euro Area Banks (Significant Institutions): Key Trends and Stylized Facts
2. Illustrative Conditional Profitability (ROE) Distributions
3. Illustrative Exercise: Bank Profitability, Growth, and NPLs
TABLES
1. Euro Area Bank Sample
2. Descriptive Statistics of Main Variables
3. Stylized Facts: Key Bank-Specific Determinants
4. Baseline Profitability Regressions: Return on Assets and Components
5. Robustness Analysis: Return on Assets
6. Return on Equity Regressions
7. Robustness Analysis: Risk-Adjusted Profitability Measures
8. Quantile Regressions: Return on Assets
9. Quantile Regressions: Return on Equity
10. Summary: Conditional Profitability (ROE) Distributions
11. Profitability Regressions: A Focus on Weaker Banks
Glossary
| AE |
Advanced economies |
| CCA |
Contingent claims analysis |
| EA |
Euro area |
| EM |
Emerging markets |
| FCI |
Financial Conditions Index |
| FSB |
Financial Stability Board |
| FVC |
Financial vehicle corporation |
| FVCDS |
Fair value CDS |
| GMM |
General method moments |
| G-SIB |
Global Systemically Important Bank |
| LCR |
Liquid coverage ratio |
| MMF |
Money market funds |
| NBNI |
Nonbank non-insurance |
| NPL |
Nonperforming loan |
| OFI |
Other financial institution |
| PD |
Probability of defaults |
|
Probability density function |
|
| ROA |
Return on assets |
| ROE |
Return on equity |
| SI |
Significant institutions |
| SSM |
Single Supervisory Mechanism |
CONTENTS
BALANCE SHEET-BASED INTERCONNECTEDNESS AND CONTAGION RISK ANALYSIS
A. Bank-Level Analysis of Interbank Exposures and Contagion Risk
B. Country-Level Analysis of Cross-Border Linkages and Contagion Risk
C. Caveats
D. Summary and Policy Implications
References
APPENDICES
I. Euro Area: Stress Test Matrix (STeM) for the Banking Sector: Contagion Risks
II. Methodology, Data, and Implementation
FIGURES
4. Banks’ Cross-Border Exposures, June 2017
5. Network Graphs, June 2017
6. Intra-EA Interconnectedness Analysis, June 2017
7. Cross-border Contagion Analysis, June 2017
8. Bank Distress Sensitivity to Model Assumptions
9. Global Interbank Exposure
10. How is Euro Area Connected to Key Global Nodes?
11. Sensitivity of the Results to the Various Loss-Given-Default Parameters
MARKET-BASED INTERCONNECTEDNESS ANALYSIS
A. Introduction
B. General Framework: An Overview
C. Data and Stylized Facts
D. Pooled OLS Versus Quantile Regressions
E. Conditional Spillover Distributions
F. Conclusions and Policy Implications
References
APPENDICES
I. Market and Balance Sheet Indicators
II. Sample Description
III. Pooled Estimation Strategy
FIGURES
12. Net Spillovers
13. Non-Linear Impact of Profitability on Spillovers Across Percentiles
14. Baseline Probability Density Functions
15. Shocks to Baseline Probability Density Functions, EA:US
16. Shocks to Baseline Probability Density Functions, EA:AE
17. Shocks to Baseline Probability Density Functions, EA:EM
18. Shocks to Baseline Probability Density Functions, EA:OE
19. Shocks to Baseline Probability Density Functions, EA:AE
20. Impact of Improved Fundamentals
TABLES
12. Determinants
13. Pooled OLS Regression Analysis
14. Probability of Inward Spillover—Baseline
15. Probability of Inward Spillover—Positive Shocks to Baseline
16. Probability of Inward Spillover—Negative Shocks to Baseline
17. Probability of Inward Spillover—Comparing Pre-, and Post-Sample
CONTINGENT CLAIMS ANALYSIS
APPENDICES
I. An Overview of the Structure of the CCA-MCS-GVAR Model
II. List of Banks, Insurers, and Countries
FIGURES
21. Scenario Conditional PD Forecasts
22. Fair Value CDS Estimates for Banks and Insurers
23. Historical Contributions to the Dynamics of PDs of Banks and Insurers
TABLES
18. Sectors and Model Variables
19. Historical Contributions to Changes in Variation of Bank, Insurer, and Sovereign PDs
DATA GAPS IN THE NONBANK, NON-INSURANCE FINANCIAL SECTOR
FIGURES
24. Data Gaps in the Nonbank, Non-Insurance Financial Sector
TABLES
20. The Nonbank, Non-Insurance Financial Sector