The Need for "Un-consolidating" Consolidated Banks' Stress Tests
International Monetary Fund, Dec 6, 2012 - Business & Economics - 21 pages
The recent crisis has spurred the use of stress tests as a (crisis) management and early warning tool. However, a weakness is that they omit potential risks embedded in the banking groups’ geographical structures by assuming that capital and liquidity are available wherever they are needed within the group. This assumption neglects the fact that regulations differ across countries (e.g., minimum capital requirements), and, more importantly, that home/host regulators might limit flows of capital or liquidity within a group during periods of stress. This study presents a framework on how to integrate this risk element into stress tests, and provides illustrative calculations on the size of the potential adjustments needed in the presence of some limits on intragroup flows for banks included in the June 2011 EBA stress tests.
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2011 EBA stress 51 banking groups activities through deposit-taking additional loss absorbency affiliates operating Algeria analysis balance sheet data bank regulators Banking Group Assets banking system Bankscope and Central based on Bankscope Basel III capital and liquidity capital ratios capital requirements Central Bank data Cerutti et a1 Christian Schmieder Consolidated Banks Core Tier countercyclical country-specific crisis cross-border banking groups Czech Republic degrees of ring-fencing deposit-taking affiliates Dexia EBA projected EBA stress test European banking groups example excess capital buffers ﬂedged FSAP full ring full ring-fencing Global Systemically Important host country regulators host regulators IMF Working Paper impact of ring-fencing included international banking groups International Monetary Fund large European banking Liquidity Stress Testing minimum capital non-EU OECD parent bank partial ring fencing percent potential re-allocated regulations e. g. Ring Fencing Adjustment risk weight share of profits solvency stress tests run Systemically Important Banks take into account Tier I capital unconsolidated approach