Reverse stress tests can be a useful tool to evaluate bank resilience to a credit shock, especially in environments where financial data are limited or opaque. This paper develops a simple and transparent country-level banking sector resilience indicator that focuses on tail risks, the Consolidated Distance to Breakpoint. Based on individual bank reverse stress test results, this novel metric quantifies the increase in nonperforming loans needed to deplete capital buffers for a subset of the most fragile banks that collectively represent at least 20 percent of total banking system assets, a level commonly associated with a systemic banking crisis. The paper calculates the Consolidated Distance to Breakpoint using public data for more than 1,500 banks in 59 emerging market and developing economies during the COVID-19 pandemic. The paper explores the value added of this metric in relation to widely used country-level macro-financial and soundness indicators. The results show that the association of the Consolidated Distance to Breakpoint with these macro-financial and financial soundness indicators is limited. This suggests that this new indicator encapsulates complementary information, possibly because aggregate measures may obscure challenges in individual banks. As such, the Consolidated Distance to Breakpoint metric could serve as a useful input to establish a basic understanding of a banking sector’s resilience.
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Autor
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Data do documento
2021/11/29
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TIpo de documento
Documento de trabalho sobre pesquisa de políticas
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No. do relatório
WPS9864
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Nº do volume
1
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Total Volume(s)
1
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País
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Região
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Data de divulgação
2021/11/29
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Disclosure Status
Disclosed
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Nome do documento
Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach
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Palavras-chave
The Basel Committee on Banking Supervision; banking system asset; net open position; increase in loan loss; volatility in commodity prices; systemic banking crisis; banking sector; minimum capital requirement; value of collateral; gross loans; stress testing; bank balance sheet; financial sector policy; gross government debt; macroeconomic and fiscal; domestic banking sector; errors and omission; early warning system; amount of risk; banking system stability; balance sheet information; risk-weighted asset; foreign exchange rate; government fiscal position; financial sector performance; rural credit institution; availability of information; commodity price shock; regulatory capital; individual bank; real gdp; value added; financial datum; systemic risk; Financial Stability; liquidity risk; banking risk; financial study; gross debt; financial soundness
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