Featured Product

    IMF to Deepen Coverage of Climate Risks in Financial Sector Assessment

    February 05, 2020

    IMF published a paper that explains how its staff uses the results of stress tests for policy advice. The paper concludes by identifying the remaining challenges to make stress tests more useful for the monitoring of financial stability and offers an overview of the IMF staff work program in that direction. Going forward, the IMF staff plans to expand and deepen the coverage of climate-related risk in assessments under the Financial Sector Assessment Program or FSAP. Better understanding the macro-financial transmission of climate risks is where the IMF staff can build on their comparative advantages, help country authorities strengthen their policy frameworks, and contribute to the global debate.

    The paper explains the difference between a macro-prudential stress test and a supervisory stress test. After a brief section on the evolution of stress tests at IMF, the paper presents the key steps of an IMF staff stress test. This is followed by a discussion on how IMF staff uses stress tests results for policy advice. IMF stress tests primarily apply to depository intermediaries, and in particular, global and domestic systemically important banks. In many cases, following the identification of specific sources of systemic risk, IMF staff have also included in the FSAPs stress tests of nonbanks, such as insurance and asset management companies and nonfinancial firms, as well as estimates of stress for households. IMF staff members also provide technical assistance in stress testing to a large number of its member countries.

    IMF staff is increasingly using stress test results to support macro-prudential policy advice. Stress tests can support recommendations of micro-prudential measures, such as higher provisions or enhanced rules to related party transactions. Increasingly, recommendations of macro-prudential nature to mitigate systemic risk are also made. They include measures such as additional capital cushions, limits on credit demand (for example, debt-service-to-income ratios), and floors to capital ratios. Staff has also developed a general equilibrium model to signal when to loosen or tighten macro-prudential policy measures. The model uses macroeconomic and financial time series to derive risk measures and to assess fluctuations in default risk. It differentiates between idiosyncratic and aggregate risk. The dynamics of the model indicate that bank capital is undershooting during downturns and overshooting during booms. The model can be used to estimate nonfinancial firm and financial intermediary probabilities of default and quantify its deviation from the optimum. If risks are too high, macro-prudential policies should be tightened. On the contrary, if risks are too low, macro-prudential policies should be loosened.

    Given the likely massive financial stability challenges due to climate change, IMF staff are prioritizing the assessment of the macro-financial transmission of climate risk. Work is ongoing to examine, on a pilot basis, financial stability risks associated with the transition to a low-carbon economy. The transition risks are multifaceted and inherently hard to model. Moreover, climate change and the adjustment to a low-carbon economy are subject to fundamental uncertainty. However, an essential element in the assessment of climate risk is the availability of sufficiently detailed information. Thus, IMF supports public- and private-sector efforts to adopt climate risk disclosures across markets and jurisdictions, particularly by following the recommendations of the Task Force on Climate related Financial Disclosures (2017). A well-defined, internationally comparable taxonomy of green assets, as well as disclosure standards, would help incentivize market participants to reflect climate risks in prices. Unfortunately, disclosures are still uneven across asset classes and jurisdictions. However, a comprehensive climate stress testing would require improved provision and accessibility of high-quality data.

     

    Related Link: Policy Paper

     

    Keywords: International, Banking, Insurance, Securities, Stress Testing, Systemic Risk, Macro-Prudential Policy, Climate Change Risks, Disclosures, Big Data, IMF

    Featured Experts
    Related Articles
    News

    APRA Reviews Repayment Deferral Plans, Identifies Best Practices

    APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.

    September 22, 2020 WebPage Regulatory News
    News

    ESAs Assess Risks to Financial Sector After COVID-19 Outbreak

    ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.

    September 22, 2020 WebPage Regulatory News
    News

    BoE Confirms Withdrawal of COVID Corporate Financing Facility

    BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.

    September 22, 2020 WebPage Regulatory News
    News

    ECB Allows Temporary Relief in Leverage Ratio Amid COVID-19 Pandemic

    ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.

    September 21, 2020 WebPage Regulatory News
    News

    ESAs Launch Survey on Templates for Product Disclosures Under SFDR

    ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).

    September 21, 2020 WebPage Regulatory News
    News

    ECB Proposes Integrated Reporting Framework to Reduce Burden for Banks

    ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.

    September 21, 2020 WebPage Regulatory News
    News

    EC Deems UK Framework for CCPs Temporarily Equivalent to EMIR Rules

    EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).

    September 21, 2020 WebPage Regulatory News
    News

    EBA to Phase Out Guidelines on Loan Repayment Moratoria

    EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.

    September 21, 2020 WebPage Regulatory News
    News

    EBA Provides Opinion on Definition of Credit Institution in CRR

    EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).

    September 18, 2020 WebPage Regulatory News
    News

    ECB Finalizes Methodology to Assess CCR and A-CVA Risk of Banks

    ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.

    September 18, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5820