## BACKGROUND NOTE: ASSESSING SYSTEMIC FINANCIAL STABILITY RISKS DUE TO FX MISMATCHES ## Source details **Canonical URL:** [BACKGROUND NOTE: ASSESSING SYSTEMIC FINANCIAL STABILITY RISKS DUE TO FX MISMATCHES](https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022010.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2022/english/ppea2022010.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2022/english/ppea2022010.pdf.json) --- ### Overview and purpose - Purpose: Outline the approach of the proposed revision to the Institutional View (IV) when assessing whether systemic financial stability risks are elevated due to foreign currency (FX) mismatches. - Proposed change: Considers the use of preemptive CFM/MPMs to be appropriate in certain circumstances when systemic risks are elevated, mainly owing to FX mismatches in the private sector. - Two-step approach preview: - Step 1: Assess FX mismatches at relevant remaining maturities using multiple indicators to determine whether mismatches are high enough to warrant Step 2. - Step 2: Assess systemic risks stemming from such FX mismatches, taking account of amplifying and mitigating factors. - Annex: Assessment for preemptive CFM/MPMs on local currency debt inflows in narrow and exceptional circumstances. ### Definitions and scope - FX mismatch at any relevant remaining maturity: "the stock of FX liabilities which is not covered by liquid FX assets or FX hedges (either natural hedges or financial contracts in deep hedging markets). FX mismatches give rise to solvency risks that may arise from impact of currency depreciation on the entire balance sheet and/or liquidity risks from short-term liabilities." - Two vulnerability forms: - FX balance sheet mismatches: assets and liabilities denominated in different currencies, affecting solvency through exchange rate changes. - FX maturity mismatches: long-term assets/operations funded by short-term FX liabilities, creating rollover and FX liquidity risk. ### Key contextual points - Builds on staff guidance regarding risk assessments in bilateral surveillance, including Article IV consultations and the 2021 Comprehensive Surveillance Review. - Paragraphs 15 and 16 of the Board paper provide cross-references: - Paragraph 15: systemic financial risks must be elevated owing to FX mismatches for preemptive CFM/MPMs on FX debt inflows. - Paragraph 16: narrow exceptions for local currency debt inflows (Annex). ### Mechanisms by which FX mismatches create systemic risks - Amplification channels producing sharp macro-financial effects: - Tightening of financial conditions. - Procyclical cutbacks in lending (local and FX). - Potentially systemic banking and/or currency crises. - Illustrative channels and consequences: - FX balance sheet mismatch: depreciation raises local currency value of FX liabilities and FX debt service, increasing credit risk and triggering macro-financial feedbacks. - FX maturity mismatch: short-maturity FX liabilities and contingent claims can spike FX cash outflows, prompting defaults, fire sales, valuation losses, and higher funding costs. - Interaction/independence: - Either mismatch type can exist without the other; balance sheet assessment must consider relevant remaining maturities. ### Amplifiers of systemic risks - Leverage: - Higher debt service as a share of income raises default likelihood after depreciation; high leverage reduces equity cushion and can make macro-financial effects non-linear. - Strong capital positions can mitigate rollover risk by improving confidence to roll over or obtain FX funding. - Overvalued asset prices: - Accumulation of FX debt (e.g., FX-indexed mortgages) can fuel overvaluation; declines compound tightening of financial conditions. - Foreign investor presence in local currency bond markets: - Significant foreign holdings in underdeveloped local currency markets can amplify risks if foreign funding reverses, causing bond sales, FX purchases, sharp depreciation, and stress for FX-liability holders. ### Data sources and availability (examples cited) - Sectoral breakdowns and external balance sheet data sources include: - BIS Locational Banking Statistics (LBS) - BIS International Debt Securities Statistics (IDS) - BIS Quarterly External Debt Statistics (QEDS) - IMF Monetary and Financial Statistics (MFS) - IMF International Investment Position Statistics (IIP) - Balance Sheet Approach (BSA) matrix data - Note: Primary data sources provide coverage for a great majority of the Fund’s membership, but data gaps may be severe for some countries; potentially large unmeasured items include FX loans from non-BIS-reporting institutions, inter-company FX debts, contingent FX liabilities, FX swaps, and other off-balance-sheet FX liabilities. ### Step 1 — Assessing FX mismatches at relevant maturities (components) - Required components: - (i) Stock of FX liabilities. - (ii) Denomination of assets and availability of hedges. - (iii) Maturity structure of the balance sheet (FX liabilities, assets, hedges). - Use multiple indicators for each component, subject to data availability. - Diagnostic elements: - FX debt stocks: assess economy-wide and by sector (households, non-financial corporations (NFCs), banks, non-bank financial institutions (NBFIs)); sectoral breakdowns identify pockets of vulnerability and heterogeneity. - FX assets and hedges: assess natural hedges, holdings of liquid FX assets, and financial contracts in deep hedging markets; check whether hedges are held by the same entities that carry the FX debt. - Maturity structure: breakdown FX debt and assets by maturity to identify short-term FX exposures; where maturity data are missing, use proxies (e.g., external interbank debt likely short-term and FX). ### Box 1 — Hypothetical country (selected quantitative observations from Step 1) - NFCs’ FX borrowing: about 6 percent of GDP from external sources and about 25 percent of GDP from domestic sources. - Banks’ cross-border borrowing in FX: high, at about 19 percent of GDP. - Share of short-term debt in total external debt and in internationally-issued FX securities for banks or depository corporations: about 40 percent. - For other sectors, share of short-term debt in total external debt: 30 percent. - Asset-side notes: - Liquid FX and external assets (proxied by claims on domestic or foreign banks and portfolio assets) appear smaller than liabilities as a share of GDP, although total external assets (available in BSA data) are larger, especially for NFCs. - Some private-sector FX assets (including FDI and trade credits) are not clearly liquid without further information. - Time-series and peer comparisons: - NFCs’ domestic and cross-border FX liabilities have grown steadily over time. - NFCs’ cross-border borrowing in FX as a share of GDP is moderate relative to peers, but their domestic FX debt is relatively high. - Judgment from publicly available data in this hypothetical: FX mismatches may be high enough to proceed to Step 2. ### Step 1 — Judging whether FX mismatches are elevated (practical guidance) - Judgment required because granular data on FX debt and hedges are often incomplete and country-specific factors affect hedging markets and sectoral aggregation. - If FX mismatches at relevant maturities are judged high in Step 1 for at least one macro-critical sector, proceed to Step 2. - If mismatches are in an intermediate range, it is desirable to err on the side of caution and move to Step 2. - It is sufficient for FX mismatches to be elevated for one macro-critical sector; Step 2 should focus on identified sectors. ### Step 2 — Assessing systemic financial stability risks from elevated FX mismatches - Systemic risks depend on the economy’s financial structure, type and strength of macro-financial linkages, and mitigating/amplifying factors. - Preferred approach: granular stress tests of relevant sectors to trace transmission of shocks through domestic financial and non-financial sectors. - Solvency stress test: - Assess how an adverse macroeconomic scenario, including a calibrated level of depreciation, may increase defaults due to FX balance sheet mismatches and affect bank solvency. - Liquidity stress test: - Calibrate size of depreciation and withdrawal of FX funding to the private sector. - Include assumptions for liquidation of each sector’s FX assets and operation of FX hedging markets under stress. - Identify spillovers of FX shortfalls onto the rest of the economy using information on financial system structure, elevated asset valuations, and policy support availability. - Objective: assess whether key sectors can withstand the shock, quantify domestic contagion, and judge degree of FX policy support that may be needed. - Box 2: Example system-wide FX liquidity stress-testing tool: - Extends standard bank liquidity stress-testing approach to other sectors. - Agents fall into FX liquidity stress when net FX cash outflows exceed FX liquid asset buffers. - Three cashflow sources: operations (imports/exports), investment income/expenses (interest/dividends), financing (contractual, contingent, new contracts/rollovers). - Tool identifies transmission channels from balance-of-payments-related FX liquidity shocks to domestic contagion via cross-sector balance sheet linkages and relies mostly on BSA matrix data and typical WEO projections with staff assumptions for missing information. ### Role of country authorities and use of additional information - Authorities may have unpublished data shaping Step 2 (composition of foreign investor base, financial network data, NFC balance sheets, credit registries, legal guidelines for asset liquidation sequencing). - Authorities may provide unpublished central bank stress tests. - Staff and authorities can fill gaps linking amplifying/mitigating variables to FX mismatches (e.g., overlap between holders of domestic assets and FX borrowers; FX contingent liabilities in large corporates; government capacity to draw down FX buffers). ### Alternative when stress tests are not feasible — Narrative risk assessment - Structured narrative can build on existing bilateral surveillance risk assessments and should include: - Assessment of systemic risks and whether a capital inflow reversal could lead to elevated systemic financial stress. - Connection of amplifying and mitigating factors to FX mismatches (examples: FX debt service as percent of export revenues; elevated housing/stock valuations tied to high leverage; large FX contingent liabilities; resilience of FX hedging markets; availability of FX buffers such as sovereign wealth funds, FX reserves, FX swap lines, and/or Fund arrangements). ### Conclusion and implications for preemptive CFM/MPMs - The two-step approach structures assessment of systemic financial stability risks from FX mismatches and emphasizes a holistic assessment using all available data and judgment. - Determining whether elevated FX mismatches pose systemic risks is a key element in assessing the appropriateness of preemptive CFM/MPMs, alongside other elements (e.g., that MPMs are not sufficient). - Granular risk-assessment information improves understanding of financial system structure and interlinkages and can inform bilateral surveillance more broadly. - Methodological and data innovations may evolve approaches over time. *International Monetary Fund — Background Note: Assessing Systemic Financial Stability Risks Due to FX Mismatches* ### INTRODUCTION____________________________________________________________________________________2 ### INTRODUCTION ### Overview - Purpose: Outline the approach of the proposed revision to the Institutional View (IV) when assessing whether systemic financial stability risks are elevated due to foreign currency (FX) mismatches. - Proposed change: Considers the use of preemptive CFM/MPMs to be appropriate in certain circumstances when systemic risks are elevated, mainly owing to FX mismatches in the private sector. - Structure: Illustrates sources of systemic risks from FX mismatches, the proposed two-step assessment approach, and examples of useful information and tools. ### Key contextual points from the note - The guidance builds on staff guidance regarding risk assessments in bilateral surveillance, including Article IV consultations and the 2021 Comprehensive Surveillance Review. - The note proposes a two-step approach: - Step 1: Assess FX mismatches at relevant remaining maturities using multiple indicators to determine whether mismatches are high enough to warrant Step 2. - Step 2: Assess systemic risks stemming from such FX mismatches, taking account of amplifying and mitigating factors. - Annex: Describes assessment for preemptive CFM/MPMs on local currency debt inflows in narrow and exceptional circumstances. *February 18, 2022 — BACKGROUND NOTE: ASSESSING SYSTEMIC FINANCIAL STABILITY RISKS DUE TO FX MISMATCHES* ### Definitions and scope - FX mismatch at any relevant remaining maturity: "the stock of FX liabilities which is not covered by liquid FX assets or FX hedges (either natural hedges or financial contracts in deep hedging markets). FX mismatches give rise to solvency risks that may arise from impact of currency depreciation on the entire balance sheet and/or liquidity risks from short-term liabilities." - Two forms of vulnerabilities from FX debt stocks: - FX balance sheet mismatches: assets and liabilities denominated in different currencies, affecting solvency through exchange rate changes. - FX maturity mismatches: long-term assets/operations funded by short-term FX liabilities, creating rollover and FX liquidity risk. ### Cross-references within the note - The assessment elaborates on paragraphs 15 and 16 of the Board paper: paragraph 15 requires systemic financial risks be elevated owing to FX mismatches for preemptive CFM/MPMs on FX debt inflows; paragraph 16 addresses narrow exceptions for local currency debt inflows (Annex). --- ### SOURCES OF SYSTEMIC RISKS FROM FX MISMATCHES ### Mechanisms by which FX mismatches create systemic risks - FX mismatches can amplify effects of financial shocks (e.g., capital flow reversals, exchange rate depreciation), producing sharp macro-financial effects including: - Tightening of financial conditions. - Procyclical cutbacks in lending (local and FX). - Potentially systemic banking and/or currency crises. ### Illustrative channels and consequences - FX balance sheet mismatch: - Depreciation increases local currency value of FX liabilities while asset values remain unchanged, pressuring solvency. - Depreciation increases local currency value of FX debt service due, raising direct and indirect credit risk and potentially triggering broader macro-financial feedbacks (e.g., cutbacks in expenditure). - FX maturity mismatch: - Short-maturity FX liabilities create rollover risk upon reversal of FX debt inflows. - Contingent claims (activation of FX credit lines, derivatives, covenants triggering early repayment) can spike FX cash outflows. - Responses may include defaults on short-term FX liabilities, fire sales of assets at depressed prices, valuation losses, and higher funding costs — weakening profitability and solvency. ### Interaction and independence of mismatch types - Either mismatch type can exist without the other: - Rollover risk may exist absent an overall balance sheet mismatch, so balance sheet assessment must consider relevant remaining maturities. - An overall FX balance sheet mismatch does not imply FX maturity mismatches (liabilities could be long-term). ### Amplifiers of systemic risks - Leverage: - Higher debt service as a share of income raises default likelihood after depreciation. - High leverage reduces equity cushion, making macro-financial effects of depreciation non-linear and larger. - Strong capital positions can mitigate rollover risk by improving confidence to roll over or obtain FX funding. - Overvalued asset prices: - Accumulation of FX debt (e.g., FX-indexed mortgages) can fuel overvaluation; asset price declines during a reversal compound tightening of financial conditions. - Foreign investor presence in local currency bond markets: - Significant foreign holdings in underdeveloped local currency markets can amplify risks if foreign investor funding reverses, leading to bond sales, FX purchases, sharp depreciation, and stress for FX-liability holders. --- ### RISK ASSESSMENT APPROACH ### Two-step assessment overview - Step 1: Assess the level of FX mismatches at relevant remaining maturities using multiple indicators. - Step 2: If mismatches are high enough, assess systemic risks from those mismatches, accounting for amplifying and mitigating factors. ### Step 1 — Assessing FX mismatches at relevant maturities (components) - Three required components: - (i) Stock of FX liabilities. - (ii) Denomination of assets and availability of hedges. - (iii) Maturity structure of the balance sheet (FX liabilities, assets, hedges). - Use multiple indicators for each component, subject to data availability. ### Step 1 — Data elements and diagnostic indicators - FX debt stocks: - Assess private sector FX debt stocks economy-wide and by sector (households, non-financial corporations (NFCs), banks, non-bank financial institutions (NBFIs)). - Sectoral breakdowns help identify pockets of vulnerability and heterogeneity (e.g., exporters vs. domestic-oriented firms, offshore issuance, trade-credit linkages, off-balance-sheet exposures, contingent liabilities). - FX assets and hedges: - Assess whether FX debt is hedged at relevant maturities via natural hedges, holdings of liquid FX assets, or financial contracts in deep hedging markets. - Natural hedges: approximated by export revenues net of FX expenses for corporates, or remittances for households. - Note: non-deliverable instruments protect against valuation losses but do not provide FX liquidity at maturity. - Consider whether hedges are held by the same entities that carry the FX debt (requires granular data). - Maturity structure: - Breakdown of FX debt stocks and assets by maturity to identify short-term FX exposures and mismatches between FX obligations due and liquid FX assets. - Timing of FX income and hedges critical to maturity alignment; hedging markets’ depth under stress is a key consideration. - Where maturity data are missing, use proxies (e.g., external interbank debt likely short-term and FX) and asset-side proxies (portfolio and other investment assets, currency and deposits subcomponents in IIP or BSA viewed as having significant liquid components). - Possible to proxy ratio of FX to local currency debt in short-term external debt series from IIP. ### Data sources and availability (examples cited) - Sectoral breakdowns and external balance sheet data sources include: - BIS Locational Banking Statistics (LBS) - BIS International Debt Securities Statistics (IDS) - BIS Quarterly External Debt Statistics (QEDS) - IMF Monetary and Financial Statistics (MFS) - IMF International Investment Position Statistics (IIP) - Balance Sheet Approach (BSA) matrix data - Example end-2019 availability noted in the note for various sectors and datasets (specific country counts provided in the source). --- ### NEXT STEPS IN THE APPROACH (preview) - If Step 1 indicates elevated FX mismatches at relevant maturities, proceed to Step 2 to assess systemic risk exposure, incorporating: - Amplifying factors (leverage, asset price overvaluation, foreign investor concentration). - Mitigating factors (capital buffers, access to hedging and FX liquidity, central bank capacity to supply FX). - The note also contains: - Box 1: Step 1 applied to a hypothetical country. - Box 2: System-wide FX liquidity stress testing tool. - Annex I: Assessment for preemptive CFM/MPMs on local currency debt inflows. *BACKGROUND NOTE: ASSESSING SYSTEMIC FINANCIAL STABILITY RISKS DUE TO FX MISMATCHES — International Monetary Fund* ### 13. Other country-specific information should be used to assess FX mismatches. While the ### 13. Other country-specific information should be used to assess FX mismatches. ### Data availability, gaps, and country-specific information - Primary data sources provide coverage for a great majority of the Fund’s membership, but data gaps may be severe for some countries (e.g., country not included in dataset, or datasets not measuring all external liabilities and assets). - Potentially large unmeasured items include: FX loans from non-BIS-reporting institutions, inter-company FX debts, contingent FX liabilities, FX swaps, and other off-balance-sheet FX liabilities. - When data gaps exist, quantitative and qualitative information regarding these debt and asset positions should be uncovered as much as possible to assess FX mismatches. - Country authorities contemplating preemptive CFM/MPMs may have access to additional unpublished data on FX mismatches and soft information (for example, whether most borrowing is by FDI companies with parent guarantees or from parent companies). ### Step 1 — Judging whether FX mismatches are elevated - The assessment of whether FX mismatches are elevated requires judgment because: - Granular data on FX debt and hedges are often incomplete. - Country-specific factors affect functioning of hedging markets and appropriate sectoral aggregation. - A holistic assessment should consider available data, country-specific factors, historical trends, and peer country information. - If FX mismatches at relevant maturities are judged to be high in Step 1 for at least one macro-critical sector, proceed to Step 2. - If FX mismatches are in an intermediate range, it is desirable to err on the side of caution and move to Step 2. - It is sufficient for FX mismatches to be elevated for one macro-critical sector; Step 2 analysis should focus on identified sectors. ### Box 1 — Key findings from the hypothetical country (Step 1 applied) - Sectoral FX debt stocks assessed across households, NFCs, NBFIs, and banking sector using internationally issued FX bonds, cross-border FX loans from BIS reporting institutions, and FX loans from domestic financial institutions. - Notable quantitative observations: - NFCs’ FX borrowing: about 6 percent of GDP from external sources and about 25 percent of GDP from domestic sources. - Banks’ cross-border borrowing in FX: high, at about 19 percent of GDP. - Share of short-term debt in total external debt and in internationally-issued FX securities for banks or depository corporations: about 40 percent. - For other sectors, share of short-term debt in total external debt: 30 percent. - Additional asset-side observations: - Liquid FX and external assets (proxied by claims on domestic or foreign banks and portfolio assets) appear smaller than liabilities as a share of GDP, although total external assets (available in BSA data) are larger, especially for NFCs. - Text Box Figure 4 does not include some private-sector FX assets (including FDI and trade credits) because liquid-asset status is unclear without further information. - Time-series and peer comparisons: - NFCs’ domestic and cross-border FX liabilities have grown steadily over time. - NFCs’ cross-border borrowing in FX as a share of GDP is moderate relative to peers, but their domestic FX debt is relatively high. - Judgment from publicly available data in this hypothetical: FX mismatches may be high enough to proceed to Step 2. ### Step 2 — Assessing systemic financial stability risks from elevated FX mismatches - Systemic risks depend on: economy’s financial structure, type and strength of expected macro-financial linkages, and mitigating/amplifying factors for domestic transmission. - Preferred approach: granular stress tests of relevant sectors to trace transmission of shocks through domestic financial and non-financial sectors. - Solvency stress test: - Assess how an adverse macroeconomic scenario, including a calibrated level of depreciation, may increase defaults due to FX balance sheet mismatches and affect bank solvency. - Liquidity stress test: - Calibrate size of depreciation and withdrawal of FX funding to the private sector. - Include assumptions for liquidation of each sector’s FX assets and operation of FX hedging markets under stress. - Identify spillovers of FX shortfalls onto the rest of the economy using information on financial system structure, elevated asset valuations, and policy support availability. - Objective of both tests: assess whether key sectors can withstand the shock, quantify domestic contagion, and judge degree of FX policy support that may be needed. - Box 2 provides an example system-wide FX liquidity stress-testing tool: - Extends standard bank liquidity stress-testing approach to other sectors. - Agents fall into FX liquidity stress when net FX cash outflows exceed FX liquid asset buffers. - Three sources of cashflows: operations (imports/exports), investment income/expenses (interest/dividends), and financing (contractual, contingent, new contracts/rollovers). - Tool identifies transmission channels from balance-of-payments-related FX liquidity shocks to domestic contagion via cross-sector balance sheet linkages. - Contagion and reserve drawdown depend on maturity mismatch extent, composition/nature of liquid FX assets, and order of liquidation. - Tool relies mostly on balance sheet approach matrix data (“who-to-whom” flow of funds); can be implemented using BSA and typical WEO projections with assumptions for missing information and staff judgment. ### Role of country authorities and use of additional information - Authorities may have specific concerns and unpublished data shaping Step 2 analysis (for example, composition of foreign investor base, financial network data, NFC balance sheets, credit registries, legal guidelines for asset liquidation sequencing). - Authorities may provide unpublished stress tests undertaken by the central bank. - Staff and authorities can fill gaps in quantitative and qualitative information connecting amplifying/mitigating variables to FX mismatches (e.g., overlap between holders of domestic assets and FX borrowers, FX contingent liabilities in large corporates, circumstances under which government could draw down FX buffers). ### Alternative when stress tests are not feasible — narrative risk assessment - Build on existing bilateral surveillance risk assessments to create a structured narrative including: - Assessment of systemic risks, deepening Article IV assessments as needed. - Consequences of a capital inflow reversal: whether reversal could lead to elevated systemic financial stress (relevance for appropriateness of preemptive CFM/MPMs). - Connection of amplifying and mitigating factors to FX mismatches (e.g., FX debt service as percent of export revenues; elevated housing/stock valuations tied to high leverage; large FX contingent liabilities; resilience of FX hedging markets; availability of FX buffers such as sovereign wealth funds, FX reserves, FX swap lines, and/or Fund arrangements). ### Conclusion and implications for preemptive CFM/MPMs - The two-step approach structures assessment of systemic financial stability risks from FX mismatches and emphasizes a holistic assessment using all available data and judgment. - Determining whether elevated FX mismatches pose systemic risks is a key element in assessing the appropriateness of preemptive CFM/MPMs, alongside other elements (e.g., that MPMs are not sufficient). - Granular risk-assessment information improves understanding of financial system structure and interlinkages to the domestic macroeconomy and can inform bilateral surveillance more broadly. - Methodological and data innovations may evolve approaches over time. *International Monetary Fund — Background Note: Assessing Systemic Financial Stability Risks Due to FX Mismatches* ### 2. Once it is decided to begin the assessment process, Step 1 of the risk assessment ### 2. Once it is decided to begin the assessment process, Step 1 of the risk assessment ### Step 1 — Establish presence of elevated local currency leverage and maturity mismatches - Use data on local currency debt stocks, assets, and maturity structure to establish whether leverage and maturity mismatches are high enough in at least one macro-critical sector to proceed to Step 2. - Apply judgment where mismatches are not clearly elevated or clearly safe; it is desirable to err on the side of caution and move to Step 2 when in doubt. - The analysis in Step 2 would focus on the identified sector(s). - Footnote: "If the main vulnerability of concern is FX mismatch owing to FX debt inflows, staff should conduct the risk assessment outlined in Section III of this Background Note. If local currency vulnerabilities are substantial owing to local currency debt inflows, and the narrow circumstances outlined in this Annex apply, staff should conduct the risk assessment outlined in this Annex." ### Step 2 — Assess systemic risks related to local currency leverage and maturity mismatches - Core task: assess systemic risks arising from local currency leverage and maturity mismatches identified in Step 1. - Recommended approach — Stress tests: - Preferred approach would be granular stress tests of the relevant sectors to assess both solvency and liquidity risks (such as those already conducted in FSSAs). - Stress tests should build in the impairment of policy instruments during crises which is considered applicable for the specific country and which justified the beginning of the assessment process (such as the need for sharp increases in policy rates, or the inability of the central bank to provide liquidity support). ### Building on existing risk assessments - The risk assessment can build as appropriate on existing risk assessments in Article IV reports that staff already perform in line with existing guidance (IMF, 2015; IMF, 2014). - A narrative is required establishing whether the systemic vulnerabilities arise from the local currency debt inflows, and whether crisis risks would be accentuated in the event of a reversal in these flows owing to FX mismatches or to other factors. - Example channel to consider: whether elevated housing or stock price valuations are associated with high leverage due to local currency debt inflows and which, when unwound during a reversal, would lead to stress that could not be alleviated by central bank local currency liquidity support. *Source: ppea2022010 - 2. Once it is decided to begin the assessment process, Step 1 of the risk assessment* --- _Source: https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022010.pdf_