IMF published a working paper on a study looking for robust and implementable framework for macro-prudential stress tests and policies. This report summarizes the findings of a joint research effort by Monetary and Capital Markets Department and the Systemic Risk Center.
The report presents state-of-the-art approaches on macro-prudential stress testing, including modeling and implementation challenges. It also provides a roadmap for future research and discusses the potential uses of macro-prudential stress testing to support policy. A table at the end of the report lists and summarizes the macro-prudential tools in use being used in various countries (refer to Table 1). Another table examines the design of stress testing frameworks of EU, IMF, UK, United States, Canada, Singapore, Bank of Japan, Bank of Korea, and Norges Bank (refer to Table 2).
Macro-prudential stress tests can offer quantitative, forward-looking assessments of the resilience of financial systems as a whole, to particularly adverse shocks. Therefore, they are well-suited to support the surveillance of macro-financial vulnerabilities and to inform the use of macro-prudential policy instruments. The report argues that it would be useful for authorities to adopt a structured yet flexible approach to stress testing for macro-prudential purposes. Such an approach can employ a number of separate models as part of the analysis. The report also concludes that there needs to be accountability for those in charge of formulating macro-prudential policy to the broader policymaking authorities. Also, there needs to be a clear policy on the delicate issue of transparency of stress testing results. There are costs and benefits of communicating stress test results and this involves weighing possible effects on operations of individual institutions versus the system, perception of risks at different times of the cycle, and consequences for risk-sharing within the system.
Related Link: Report
Keywords: International, Banking, Macro-prudential Policy, Stress Testing, Systemic Risk, IMF
Previous ArticleUS Agencies Reaffirm the Role of Supervisory Guidance
HM Treasury announced that the new Financial Services Bill has been introduced in the Parliament.
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.
PRA published the consultation paper CP17/20 to propose changes to certain rules, supervisory statements, and statements of policy to implement elements of the Capital Requirements Directive (CRD5).
US Agencies adopted a final rule that applies to advanced approaches banking organizations and aims to reduce interconnectedness in the financial system as well as to reduce contagion risks associated with the failure of a global systemically important bank (G-SIB).
US Agencies (FDIC, FED, and OCC) adopted a final rule that implements the net stable funding ratio (NSFR) for certain large banking organizations.
FSB finalized the toolkit of effective practices to assist financial institutions in their cyber incident response and recovery activities.
ECB published eleventh issue of the Macroprudential Bulletin, which provides insight into the ongoing work of ECB in the field of macro-prudential policy.
HM Treasury issued a call for evidence seeking views to reform the prudential regulatory regime—also known as Solvency II—of the insurance sector in UK.
ESRB responded to the EC consultation on review of Solvency II regime.
HM Treasury launched a consultation on Phase II of the Future Regulatory Framework Review, with the comment period ending on January 19, 2021.