Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach
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 ind...
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World Bank, Washington, DC
2021
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| Online Access: | http://documents.worldbank.org/curated/undefined/696701638211617923/Measuring-Systemic-Banking-Resilience-A-Simple-Reverse-Stress-Testing-Approach http://hdl.handle.net/10986/36640 |
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okr-10986-366402022-05-11T13:16:51Z Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach Feyen, Erik Mare, Davide Salvatore BANK CAPITAL BANKING SYSTEM FINANCIAL STABILITY EARLY WARNING SYSTEMS SYSTEMIC RISK 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. 2021-12-02T22:31:35Z 2021-12-02T22:31:35Z 2021-11 Working Paper http://documents.worldbank.org/curated/undefined/696701638211617923/Measuring-Systemic-Banking-Resilience-A-Simple-Reverse-Stress-Testing-Approach http://hdl.handle.net/10986/36640 English Policy Research Working Paper;No. 9864 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
BANK CAPITAL BANKING SYSTEM FINANCIAL STABILITY EARLY WARNING SYSTEMS SYSTEMIC RISK |
| spellingShingle |
BANK CAPITAL BANKING SYSTEM FINANCIAL STABILITY EARLY WARNING SYSTEMS SYSTEMIC RISK Feyen, Erik Mare, Davide Salvatore Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach |
| relation |
Policy Research Working Paper;No. 9864 |
| description |
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. |
| format |
Working Paper |
| author |
Feyen, Erik Mare, Davide Salvatore |
| author_facet |
Feyen, Erik Mare, Davide Salvatore |
| author_sort |
Feyen, Erik |
| title |
Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach |
| title_short |
Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach |
| title_full |
Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach |
| title_fullStr |
Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach |
| title_full_unstemmed |
Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach |
| title_sort |
measuring systemic banking resilience : a simple reverse stress testing approach |
| publisher |
World Bank, Washington, DC |
| publishDate |
2021 |
| url |
http://documents.worldbank.org/curated/undefined/696701638211617923/Measuring-Systemic-Banking-Resilience-A-Simple-Reverse-Stress-Testing-Approach http://hdl.handle.net/10986/36640 |
| _version_ |
1764485665957871616 |