Featured Product

    IMF Paper Studies Metrics to Assess Vulnerabilities in Banking Sector

    August 16, 2019

    IMF published a working paper that measures the performance of different metrics in assessing banking system vulnerabilities. The study finds that metrics based on equity market valuations of bank capital are better than regulatory capital ratios and other metrics in spotting banks that failed. The paper proposes that these market-based ratios could be used as a surveillance tool to assess vulnerabilities in the banking sector.

    The approach of the study presented in this paper was to test and calibrate different metrics using the banks that both failed and survived the global financial crisis. The out of sample performance of these metrics was then assessed using the banks that have since run into trouble (as well as those that have continued operating). The results show how the metrics can be implemented in practice and what they suggest about the risk of bank failures in the current environment. The paper has confirmed results of certain previous studies, which suggest that equity market-based capital ratios would have been better at signaling bank distress in the run-up to the global financial crisis than regulatory capital ratios—particularly the tier 1 capital ratio. In addition, the study tested the market-based capital ratios against other market and balance sheet indicators and found that the market-based capital ratios would have been better at predicting bank stress than these other metrics in the pre-crisis period. The analysis showed that the market-based capital ratios also performed well in the post-crisis period. This further supports the case for using these augmented capital ratios in assessing vulnerabilities in the banking sector.

    The equity market-based capital ratios suggest there are still vulnerabilities in euro area banks, some years after the end of the euro area crisis. Additionally, there are some banks in the Asia-Pacific and Other European regions that are flagged by these metrics. These measures inevitably provide a somewhat fuzzy signal, where one can expect false alarms and perhaps overshooting in its predictions in periods of market turbulence. They also do not provide a sense of exactly when problems might arise in banks and may only provide a few months, or even weeks, of advance warning of distress. They are also, obviously, only available for banks that are traded on stock markets. However, these metrics are a valuable surveillance tool for financial stability authorities assessing vulnerabilities in the banking sector.

     

    Related Link: Working Paper

    Keywords: International, Banking, Regulatory Capital, Market-based Ratios, Tier 1 Capital, Stress Testing, Capital Ratios, Research, IMF

    Featured Experts
    Related Articles
    News

    EC to Defer Application of SFDR Standards Till July 2022

    The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.

    July 23, 2021 WebPage Regulatory News
    News

    BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance

    The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.

    July 22, 2021 WebPage Regulatory News
    News

    EBA Seeks Views on Proportionality Assessment Methodology

    The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.

    July 22, 2021 WebPage Regulatory News
    News

    US Agencies Propose Changes to Call Reports and Instructions

    Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.

    July 22, 2021 WebPage Regulatory News
    News

    PRA Finalizes Rulebook Definition of Higher Paid Material Risk-Taker

    The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.

    July 21, 2021 WebPage Regulatory News
    News

    EBA Examines Asset Encumbrance in Banking Sector

    The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.

    July 21, 2021 WebPage Regulatory News
    News

    EBA Publishes Methodological Guide to Mystery Shopping

    The European Banking Authority (EBA) published a methodological guide to mystery shopping.

    July 21, 2021 WebPage Regulatory News
    News

    APRA Issues Update on Capital Reform Policy Settings for Banks

    The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.

    July 21, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Assess Continuity Planning of Market Infrastructures

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.

    July 21, 2021 WebPage Regulatory News
    News

    ESMA Responds to Proposal Related to Sustainability Standards Board

    The European Securities and Markets Authority (ESMA) has responded to the IFRS consultation on targeted amendments to the IFRS Foundation constitution to accommodate an International Sustainability Standards Board (ISSB) to set IFRS Sustainability Standards.

    July 21, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7283