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

    FASB Proposes Taxonomy Changes Related to Topics 848 and 470

    FASB proposed taxonomy improvements for the proposed Accounting Standards Update on topic 848 on facilitation of effects of reference rate reform on financial reporting.

    September 16, 2019 WebPage Regulatory News
    News

    BoE Statement on Recalculating Transitional Measures Under Solvency II

    BoE notified that it will be willing to accept applications from firms to recalculate transitional measure on technical provisions (TMTP) as at September 30, 2019.

    September 16, 2019 WebPage Regulatory News
    News

    BoE Paper on Market-Implied Systemic Risk and Shadow Capital Adequacy

    BoE published a working paper that presents a forward-looking approach to measure systemic solvency risk.

    September 13, 2019 WebPage Regulatory News
    News

    HKMA Consults on Policy Module on Pillar 2 Supervisory Review Process

    HKMA is consulting on the revised Supervisory Policy Manual module CA-G-5 that sets out the HKMA approach to conducting the supervisory review process under Pillar 2.

    September 13, 2019 WebPage Regulatory News
    News

    PRA Publishes Waiver by Consent of Continuity of Access Rules

    PRA published a new waiver by consent to waive the Continuity of Access requirements contained in the Depositor Protection Part of the PRA Rulebook (DPP).

    September 13, 2019 WebPage Regulatory News
    News

    EBA Single Rulebook Q&A: Second Update for September 2019

    EBA updated the Single Rulebook question and answer (Q&A) tool with answers to three questions.

    September 13, 2019 WebPage Regulatory News
    News

    PRA Revises Branch Return and Updates Guidance for Regulatory Reports

    PRA published the policy statement PS17/19, which contains the final policy related to changes in the format and content of the Branch Return Form and reporting guidance.

    September 12, 2019 WebPage Regulatory News
    News

    ISDA Guide on Collateral Management Under Smart Derivatives Contracts

    ISDA published the third in a series of legal guidelines for smart derivatives contracts.

    September 12, 2019 WebPage Regulatory News
    News

    ESA Report Highlights Risks of No-Deal Brexit in EU Financial System

    ESAs published a Joint Committee report on risks and vulnerabilities in the EU financial system.

    September 12, 2019 WebPage Regulatory News
    News

    ECB Modifies New Targeted Longer-Term Refinancing Operations

    The Governing Council of ECB decided to modify some of the key parameters of the third series of targeted longer-term refinancing operations (TLTRO III) to preserve favorable bank lending conditions (Decision (EU) 2019/1558).

    September 12, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 3819