Front Matter Page
IMF Country Report No. 20/247
UNITED STATES
FINANCIAL SECTOR ASSESSMENT PROGRAM
TECHNICAL NOTE—RISK ANALYSIS AND STRESS TESTING THE FINANCIAL SECTOR
This Technical Note on Risk Analysis and Stress Testing the Financial Sector for the United States FSAP was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed in July 17, 2020.
August 2020
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Front Matter Page
UNITED STATES
FINANCIAL SECTOR ASSESSMENT PROGRAM
TECHNICAL NOTE
RISK ANALYSIS AND STRESS TESTING THE FINANCIAL SECTOR
July 17, 2020
Prepared By
Monetary and Capital Markets Department
This Technical Note was prepared in the context of an IMF Financial Sector Assessment Program (FSAP) mission in the United States held during February–March 2020 led by Ms. Michaela Erbenová. It has been factually updated to incorporate COVID-19-related events in March and April 2020. It contains technical analysis and detailed information underpinning the FSAP’s findings and recommendations. Further information on the FSAP program can be found at http://www.imf.org/external/np/fsap/fssa.aspx
Contents
Glossary
EXECUTIVE SUMMARY
INTRODUCTION
A. Objective
B. Stress Testing Work Done by the Authorities
C. Risk Analysis and Stress Testing under the U.S. FSAP Program
FINANCIAL SYSTEM: RISKS AND VULNERABILITIES
A. Financial System Structure and Performance
B. Resilience and Vulnerabilities of Borrowers
C. Leveraged Finance: Leveraged Loans and CLOs
STRESS TESTING SCENARIOS
A. Scope
B. Scenario Narrative and Calibration
C. Risks Related to High-impact Events and their Transmission Channels
CORPORATE SECTOR STRESS TESTS
BANKING SECTOR STRESS TESTS
A. Solvency
B. Banking Sector Liquidity Risk Analysis and Stress Tests
C. Banking Sector Interconnectedness
LIQUIDITY STRESS TESTING FOR U.S. MUTUAL FUNDS
A. Objective and Scope
D. Methodology
E. Results
MARKET RISK STRESS TESTING FOR MONEY MARKET FUNDS
A. Objective and Scope
B. Methodology and Results
THE INSURANCE SOLVENCY STRESS TESTS
A. Objective
B. Valuation and Capital Standard
C. Sample
D. Stress Test: Adverse Scenario
E. Stress Test: Modeling Assumptions and Output
F. Stress Test: Results
G. Sensitivity Analysis
SYSTEMIC RISK, INERCONNECTEDNESS, AND CONTAGION ANALYSIS
A. Scope
B. Contagion Between Banks, Non-banks, and Nonfinancial Corporates
C. Complementary Market-Based Contagion Analysis
CONCLUSIONS
References
BOXES
1. Maximum Allowable Leverage under the Absolute VaR Approach
2. COVID-19 Impact on the Insurance Industry
3. CLO Tranches, the Pricing of Risk, and Implications for Financial Institutions
FIGURES
1. FSAP Systemic Risk Assessment Framework
2. Financial Sector
3. Mutual Funds’ Leverage and Insurers’ Asset Allocation
4. Macrofinancial Linkages
5. Intra-Financial Sector Linkages
6. Intra-Financial Sector Linkages through Common Exposures
7. Banks’ Domestic Intra-Financial System Interconnectedness
8. Banks’ Claims Based of the Ultimate Risk of the Borrowers
9. Banks’ Claims
10. Household Borrowing
11. Business Sector Borrowing
12. Stress Test Scenarios
13. Climate-Related Risks
14. Corporate Stress Test Results
15. Loss Estimation
16. Solvency Stress Testing Results—IMF Baseline Scenario
17. Solvency Stress Testing Results: Leverage Ratios under the Baseline Scenario
18. Sensitivity Analysis—Impact of Fintech
19. Solvency Stress Testing Results—Adverse Scenario
20. Solvency Stress Testing Results: Adverse Sensitivity Scenario
21. Solvency Stress Testing Results—Leverage Ratio under the Adverse Sensitivity Scenario
22. Solvency Stress Testing Results—Results Under Multiple Adverse Scenarios and Assumptions About Dividend Payouts
23. Funding Structure and Liquid Assets
24. Structural Liquidity Ratios
25. Credit and Liquidity Facilities and their Utilization
26. Cash Flows Over 30-Day Period
27. Liquidity Stress Testing Results
28. Liquidity and Asset Fire Sales Scenario for U.S. G-SIBs
29. Enhanced Interconnectedness Analysis—Solvency and Liquidity Risk Linkages
30. Liquidity and Asset Sales Scenario Propagation in the U.S. G-SIBs Network
31. Schematic Representation of the Network Contagion Analyses
32. Cross-Border Inward and Outward Spillovers by Type of Exposure
33. United States: Average Spillover between the U.S. Banking System and Foreign Banking System
34. Sensitivity Analysis using a Less Severe Scenario: Average Spillover
35. Bank-Level Inward Spillovers from Foreign Financial Systems
36. United States: Loan Funds
37. Results of the Liquidity Stress Test for the Historical Approach
38. Use of Derivatives and Liquidity Demands
39. Market Impact: Historical Approach and Adverse Scenario
40. Vulnerability Analysis: across Fund Categories
41. U.S. Money Market Funds (MMFs)
42. Risk Analysis Tools for the Insurance Sector
43. Insurance Stress Test Results
44. Life-Business: Investment Spread and Maturity of Fixed-income Assets
45. Life-Business: Termination Characteristics
46. Need to Liquidate Assets after Lapse Shock
47. Vulnerable P&C Lines of Business
48. Impact of Major Hurricanes
49. Default of the Largest Banking Counterparty
50. Insurers’ Carbon-Intense Investments
51. Exposure to Nonfinancial Corporate Securities
52. Schematic Representation of the Risk Transmission Mechanisms
53. Redemption Shock and Asset Liquidation of Mutual Funds: Price
54. Market-Based Banking Sector Interconnectedness vis-à-vis Domestic and Foreign Financial Sectors
55. Market-based Cross-Border Banking Sector Interconnectedness: Net Inward Co-movement of Domestic Banks and Large Foreign Banks
TABLES
1. Mutual Funds Stress Test—Sample and Approach
2. Results of the MMF Stress Test
3. Market Risk Parameters
4. Sample of Regionally Concentrated P&C Insurers
APPENDICES
I. Banking Sector Solvency and Liquidity Stress Testing Matrix
II. Interconnectedness Stress Testing Matrix
III. Insurance Stress Testing Matrix
IV. Mutual Funds Stress Testing Matrix
V. Grouping of Banks
VI. Risk Assessment Matrix
VII. Structure of the U.S. Financial System
VIII. Stress Test Scenarios
IX. Class: Amendments and Econometric Estimation Results
X. Contribution to Losses in Terms of RWAs
XI. Data and Sample of Funds Used in Stress Tests
XII. Mutual Fund Stress Tests Methodology
XIII. Mutual Fund Stress Tests Results
XIV. Analysis of Vulnerabilities and Interconnectedness (Mutual Funds)
XV. Sample Selection for Insurance Stress Tests
XVI. Solvency-Liquidity Network Model
XVII. Network Algorithm for Contagion (Cross-Border Interconnectedness)
Glossary
| ABS |
Asset-Backed Security |
| AE |
Asset Encumbrance |
| AFS |
Available-for-Sale |
| AR |
Auto Regressive term |
| BBB |
BBB Rating class |
| BHCs |
Bank Holding Companies |
| BIS |
Bank of International Settlement |
| BNY Mellon |
Bank of New York Mellon |
| BPs |
Basis Points |
| CAR |
Capital Adequacy Ratio |
| CB |
Central Bank |
| CBC |
Counterbalancing Capacity |
| CBOE |
Chicago Board Options Exchange |
| CCB |
Capital Conservation Buffer |
| CCP |
Central Clearing Counterparty |
| CET1 |
Core Equity Tier 1 |
| CLASS |
Capital and Loss Assessment under Stress Scenarios |
| CLO |
Collateralized Loan Obligations |
| CMO |
Collateralized Mortgage Obligation |
| CoVaR |
Conditional Value at Risk |
| CRD IV |
Capital Requirements Directive IV |
| CRR |
Capital Requirements Regulation |
| CUSIP |
Committee on Uniform Securities Identification Procedures |
| C&I |
Commercial and Industrial |
| DFAST/CCAR |
Dodd-Frank Act Stress Tests/Comprehensive Capital Analysis and Review |
| DSGE |
Dynamic Stochastic General Equilibrium |
| EaD |
Exposure at Default |
| EA |
Exposure Amount |
| ECB |
European Central Bank |
| EDFs |
Expected Default Frequencies |
| EM |
Emerging Market |
| ES |
Expected Shortfall |
| ETFs |
Exchange Traded Funds |
| FCI |
Financial Conditions Index |
| Fed |
Federal Reserve System |
| FFIEC |
Federal Financial Institutions Examination Council |
| FI |
Financial Institution |
| FINRA |
Financial Industry Regulatory Authority |
| FRB |
Board of Governors of the Federal Reserve System |
| FR-Y |
Federal Reserve report form |
| FSAP |
Financial Sector Assessment Program |
| GAAP |
Generally Accepted Accounting Principles |
| GaR |
Growth at Risk |
| GAS |
Global Assumptions |
| GDP |
Gross Domestic Product |
| GFC |
Global Financial Crisis |
| GFM |
Global Macrofinancial Model |
| GSE |
Government-Sponsored Enterprise |
| G-SIB |
Global Systemically Important Bank |
| G-SIFI |
Global Systemically Important Financial Institution |
| GVD |
Generalized Forecast-Error Variance Decomposition |
| HTM |
Held-to-Maturity |
| HY |
High-Yield |
| HQLA |
High-Quality Liquid Assets |
| ICI |
Investment Company Institute |
| ICPF |
Insurance Companies and Pension Funds |
| IHC |
Intermediate Holding Company |
| IMF |
International Monetary Fund |
| IRB |
Internal Rating-Based Approach |
| IT |
Information Technology |
| LCR |
Liquidity Coverage Ratio |
| LEI |
Legal Entity Identifier |
| LGD |
Loss-Given Default |
| LMTs |
Liquidity Management Tools |
| MASS |
Macrofinancial System Simulator |
| MBS |
Mortgage-Backed Securities |
| MF |
Mutual Fund |
| MMF |
Money Market Fund |
| NAIC |
National Association of Insurance Commissioners |
| NAV |
Net Asset Value |
| NPL |
Nonperforming Loan |
| N-PORT |
Portfolio Investments Report |
| Non-GSIB |
Non-Global Systemically Important Banks |
| OFR |
Office of Financial Research |
| OTC |
Over-the-Counter |
| PD |
Probability of Default |
| PI |
Price Impact Measure |
| PiT |
Point in Time |
| PPML |
Pseudo-Maximum Likelihood |
| PPNR |
Pre-Provision Net Revenue |
| P&C |
Property & Casualty |
| RBC |
Risk-Based Capital |
| RCR |
Redemption Coverage Ratio |
| RWAs |
Risk-Weighted Assets |
| SEC |
Securities and Exchange Commission |
| SFTs |
Securities financing transactions |
| SNL |
S&P Global Market Intelligence (formally known as SNL) |
| SSM |
Single Supervisory Mechanism |
| ST |
Stress Test |
| STA |
Standardized Approach [to capital requirements] |
| SVAR |
Structural VAR |
| TBA |
To-Be-Announced securities |
| TD |
Top-Down |
| TRACE |
Trade Reporting and Compliance Engine |
| TTC |
Through-the-Cycle |
| U.S. |
United States |
| UST |
United States Department of the Treasury |
| U.K. |
United Kingdom |
| VA |
Variable Annuities |
| VAR |
Vector Auto-Regression |
| VIX |
CBOE Volatility Index |
| WEO |
World Economic Outlook |