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

    PRA and FPC Finalize Changes to Leverage Ratio Framework in UK

    The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA

    October 08, 2021 WebPage Regulatory News
    News

    CFPB Proposes Rule on Small Business Lending Data Collection

    The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.

    October 08, 2021 WebPage Regulatory News
    News

    PRA Decides to Maintain O-SII Buffers for Another Year

    The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.

    October 08, 2021 WebPage Regulatory News
    News

    FSB Report Assesses Implementation of Recommendations on Stablecoins

    The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.

    October 07, 2021 WebPage Regulatory News
    News

    APRA Updates Loan Serviceability Expectations for Home Lending

    In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.

    October 06, 2021 WebPage Regulatory News
    News

    CPMI and IOSCO Consult on Guidance on Stablecoin Arrangements

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.

    October 06, 2021 WebPage Regulatory News
    News

    EBA and EIOPA Set Out Work Priorities for 2022

    The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.

    October 05, 2021 WebPage Regulatory News
    News

    MFSA Issues Reporting Updates and Guidance for Banks

    The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.

    October 05, 2021 WebPage Regulatory News
    News

    EC Publishes Decision on List of Equivalent Third Countries Under CRR

    The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).

    October 04, 2021 WebPage Regulatory News
    News

    EC Rule on Contractual Recognition of Write-Down and Conversion Powers

    EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.

    October 04, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7552