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INTERNATIONAL MONETARY FUND
MONETARY AND CAPITAL MARKETS DEPARTMENT
DEPARTMENTAL PAPER
The Global Bank Stress Test
Prepared by Xiaodan Ding, Marco Gross, Ivo Krznar, Dimitrios Laliotis, Fabian Lipinsky, Pavel Lukyantsau, and Thierry Tressel
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Copyright ©2022 International Monetary Fund
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Names: Ding, Xiaodan, author. | Gross, Marco, author. | Krznar, Ivo, author. | Laliotis, Dimitrios, author. | Lipinsky, Fabian, author. | Lukyantsau, Pavel, author. | Tressel, Thierry, author. | International Monetary Fund. Monetary and Capital Markets Department, issuing body. | International Monetary Fund, publisher.
Title: The global bank stress test / prepared by Xiaodan Ding, Marco Gross, Ivo Krznar, Dimitrios Laliotis, Fabian Lipinsky, Pavel Lukyantsau, and Thierry Tressel.
Other titles: Departmental Papers (International Monetary Fund).
Description: Washington, DC : International Monetary Fund, 2022. | April 2022. | DP/2022/009. | Departmental paper series. | Includes bibliographical references.
Identifiers: ISBN 9798400204524 (paper) Subjects: LCSH: Banks and baking, International -- Evaluation. | Banks and banking -- Risk management. | International finance.
Classification: LCC HG3881.D56 2022
The paper was prepared under the guidance of Vikram Haksar and includes earlier inputs from Ibrahim Ergen and Elizabeth Mahoney and helpful comments from James Morsink and other colleagues at the IMF.
The Departmental Paper Series presents research by IMF staff on issues of broad regional or crosscountry interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Contents
Executive Summary
Acronyms and Abbreviations
1. Introduction
2. How Does the GST Work?
3. Global Bank Stress Test—2021/22 Update
4. Accounting for Mitigating Policies
5. Conclusion.
Annex 1. The GST Methodology
Annex 2. Data Used in the GST
Annex 3. GST Scenarios
References
BOXES
Box 1. Designing Adverse Scenario in FSAPs
Box 2. Severe Adverse Scenario
Box 3. Corporate Stress Testing: Assessing Mitigating Policy for Corporate Portfolios
Box 4. Household Debt: Assessing Mitigating Policies Using a Micro–Macro Simulation Model
FIGURES
Figure 1. Capital Ratio Revolution, EMs and AEs
Figure 2. Global Stress Test Macroeconomic Scenarios
Figure 3. GST Results–Baseline and Adverse Scenarios
Figure 4. Sensitivities of Net Loan Losses to Main Drivers, AEs versus EMs
Figure 5. GDP Shock and Change in CET1 Ratio
Figure 6. Distribution of Bank Assets by Capital Ratio under Adverse Scenario
TABLES
Table 1. Sample of the GST
Executive Summary
Shocks to financial systems can lead to financial crises, which have large costs in terms of foregone growth and weakening of economywide balance sheets. Financial policymakers around the world aim at increasing the resilience of their financial systems, an important part of which is risk analysis.
Bank stress tests are conducted at a national level by central banks and supervisory authorities to assess the resilience of banks. In some cases, these analyses are conducted by supra-national authorities for members of a currency union. But generally, the focus is on risks to national banking systems, with less emphasis on global risks and resilience. Moreover, countries differ widely in the nature of their granular supervisory data and methodologies for stress testing and scenario design used in authorities’ stress tests. This factor poses challenges for comparing scenarios and stress testing results across countries.
The IMF staff assess systemic risk as part of the IMF’s mandate to monitor global financial stability, leveraging the conceptual framework of “growth-at-risk” approach developed by the IMF (see IMF 2017). These risks are analyzed at the multilateral level in the flagship series Global Financial Stability Report (GFSR) and at the country level in the context of Article IV surveillance and the Financial Sector Assessment Program (FSAP). Assessing the impact of global shocks—such as those arising from the pandemic—that have highly differentiated effects across countries and economic sectors, eliciting equally diverse policy responses, is a challenge. This has fagged the importance of developing a global bank stress testing approach that undertakes consistent risk analysis of the impact on countries of common global shocks, incorporating cross-country spillovers and synergizing with the more granular deep dives undertaken in the context of the IMF’s bilateral work.
In this context, IMF staff developed the Global Bank Stress Test (GST) launched in the October 2020 GFSR to provide insights on the impact of the pandemic on banking systems around the world. Beyond the pandemic, the GST provides a flexible yet rigorous framework to assess the implications of common global shocks and their spillovers on the IMF membership and to inform policy discussions at both the bilateral and multilateral level. The GST is the first cross-country framework that provides an analysis of resilience of banks at the global level using consistent global scenarios and a common methodology. It also provides a benchmark for national authorities to compare the resilience of their banks to banks in other countries and captures the effects of cross-border spillover and implicit spill backs via both financial and real economy linkages, and the effects of such linkages under various stress scenarios.
This paper presents the framework underlying the GST and applies it to recent data and global scenarios to illustrate the usefulness of the framework in assessing the potential impact of global shocks on banks around the world. The results of this latest update of the GST continue to point to relatively lower levels of resilience of banks in emerging market economies (EMs) than in advanced economies (AEs). The simulation uses baseline and adverse scenarios for macro-financial variables during 2022–24 based on the October 2021 World Economic Outlook (WEO). The adverse scenario simulates the potential impact of a prolongation of the pandemic owing to new variants, vaccine efficacy, and the pace of vaccine rollout. The exercise finds that banks in AEs have raised bank capital (CET1) ratios by about 0.8 percentage points in 2020 and are generally resilient to continued pandemics shocks. However, stresses could be higher in EMs reflecting the fact that EM banks face larger downside macro-financial risks in an adverse scenario, have a higher sensitivity to shocks, and have built somewhat less capital during the peak of the pandemic in 2020. Considering the significant uncertainty about the evolution of the global outlook, the exercise also presents the results of a severe adverse scenario, going further into the tail of the distribution of global macro-financial outcomes. Larger effects on bank capital would materialize in such a tail event, with a similar pattern of EMs being more exposed. These results paint an encouraging picture of resilience, but also a need for continued close monitoring, especially in EMs experiencing a more restrained macro-financial policy space in responding to further shocks.
Acronyms and Abbreviations
| AEs | Advanced Economies |
| BMA | Bayesian Model Averaging |
| CET1 | Capital Tier 1 |
| EMs | Emerging Markets |
| FSAP | Financial Sector Assessment Program |
| FSGM | Flexible System of Global Models |
| GDP | Gross Domestic Product |
| GFC | Global Financial Crisis |
| GFSR | Global Financial Stability Report |
| GST | Global Bank Stress Test |
| LGD | Loss Given Default |
| NFCI | Net Fee and Commission Income |
| Nil | Net Interest Income |
| NLL | Net Loan Losses |
| NTI | Net Trading Income |
| OCI | Other Comprehensive Income |
| PD | Probability of Default |
| P&L | Profit and Loss |
| RWA | Risk-Weighted Assets |
| WEO | World Economic Outlook |