FSI published a paper that presents the findings of a comparative analysis on the system-wide stress tests for banks in the euro area, Japan, Switzerland, and the United States. The paper identifies three building blocks in the setup of any stress test—governance, implementation, and outcomes—and relates them to the policy objectives, which can be micro-prudential or macro-prudential.
On the basis of an extensive review of the choices that authorities need to make about the design of a stress test within each of these building blocks, the paper argues that stress tests are most effective when their design is fully aligned with the policy objectives associated with them. This is because micro-prudential and macro-prudential objectives may require different approaches. Consistency with the Basel Committee's high-level principles for stress testing is an important step in this regard. Stress tests are best used in combination with other tools available to the authorities to achieve their policy objectives, such as systemic risk monitoring or capital planning reviews.
The analysis suggests that stress testing is being continually improved and further developments could help to enhance the implementation and the policy use of stress tests. There are several areas in which stress tests could be improved, such as, on the implementation side, the joint treatment of solvency and liquidity risks, or the specification of second-round, spillover and contagion effects. On the policy side, more authorities could use stress tests as an input to the calibration of macro-prudential measures. Additionally, stress tests could be further integrated into regular supervisory reviews.
Some of these changes will be driven by progress in research or advances in technology, while others will be dependent on gaining enough practical experience, especially in the macro-prudential sphere. From a global perspective, a dialog among relevant authorities regarding a common scenario design for large and cross-border active banks would be a helpful addition to the stress testing landscape.
Keywords: International, Banking, Stress Testing, Systemic Risk, Macro-prudential Policy, FSI
Previous ArticleIASB Publishes November Issue of the Investor Update
APRA is consulting on the reporting standard for credit risk management (ARS 220.0).
FCA and PRA in the UK, FED in the US, and the authorities in Singapore have fined Goldman Sachs for risk management failures in connection with the 1Malaysia Development Berhad (1MDB).
ISDA launched the IBOR Fallbacks Supplement and the IBOR Fallbacks Protocol, with both becoming effective on January 25, 2021.
BCBS announced that OSFI and the Bank of Canada hosted the 21st International Conference of Banking Supervisors (ICBS) virtually on October 19-22, 2020.
FCA proposed guidance on how firms should continue to seek to help customers who hold insurance and premium finance products and may be in financial difficulty because of COVID-19, after October 31, 2020.
EBA issued an opinion on prudential treatment of the legacy instruments as the grandfathering period nears an end on December 31, 2021.
ESRB published the fifth issue of the EU Non-bank Financial Intermediation Risk Monitor 2020 (NBFI Monitor).
HM Treasury announced that the new Financial Services Bill has been introduced in the Parliament.
APRA announced that it has increased the minimum liquidity requirement of Bendigo and Adelaide Bank for failing to comply with the prudential standard on liquidity.
Ambassadors of EU member states agreed on the mandate of European Council on the Capital Markets Recovery Package, to support economic recovery from the COVID-19 crisis.