## wpiea2021200-print-pdf - References ## Source details **Canonical URL:** [wpiea2021200-print-pdf - References](https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021200-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2021/english/wpiea2021200-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2021/english/wpiea2021200-print-pdf.pdf.json) --- ### I. INTRODUCTION — purpose and motivation - COVID-19 demonstrates that sudden and deep recessions can threaten financial stability and highlights importance of analyzing macrofinancial linkages in macroeconomic surveillance. - Growth in publication of Financial Stability Reports (FSRs): - The number of jurisdictions publishing FSRs rose to close to 120 in 2020, from less than ten in the late 1990s. - IMF initiatives and evaluations referenced: - Staff Guidance Notes on Macroprudential Policy (IMF 2014a). - Mainstreaming Macrofinancial Initiative (started with 24 pilot jurisdictions in 2015; expanded to 67 and 128 jurisdictions in 2016 and 2017, respectively, and the full membership in 2018). - IMF Independent Evaluation Office (IEO) evaluation of IMF financial surveillance in 2019 (found progress but called for further improvement). - IMF Policy Paper on Systemic Risk and Macroprudential Policy Advice in Article IV Consultations (IMF 2021) (found significant, but uneven, progress and called for expanding the pool of macrofinancial talent). - Rationale for the paper: - Broad availability of high-quality FSRs can support IMF efforts to strengthen macrofinancial surveillance across the membership. - FSAP assessments are comprehensive but typically done only once in 5 or more years and concentrate on a subset of membership; they are data and resource intensive and often rely on confidential supervisory data. - IMF country teams often rely on external research—including FSRs—to form views on systemic risk. ### Comparative scope and main research questions - Primary objective: examine IMF Article IV staff reports and FSRs for 32 jurisdictions to assess differences in systemic risk analysis and identify opportunities to expand IMF country teams’ toolkit for systemic risk assessment. - Central questions: - Whether FSRs and IMF Article IV staff reports contain a clear statement on systemic risk. - How systemic risks and vulnerabilities are identified. - How macrofinancial linkages are discussed. - Key comparative findings: - Unlike IMF Article IV staff reports, all reviewed FSRs include a well-articulated view on systemic risk (as defined in Section II). - FSRs cover a wider range of systemic risks and vulnerabilities and discuss the macroeconomic policy mix (monetary, fiscal, and macroprudential policy) more than Article IV staff reports. - FSRs rely more on analytical tools such as banks’ stress tests and growth-at-risk to assess systemic risk than IMF Article IV staff reports. - Cross-fertilization exists: some IMF Article IV staff reports use stress test results published in FSRs; some FSRs use growth-at-risk—first used in the Global Financial Stability Report (IMF 2017b). - FSRs conduct stress tests for nonbank financial institutions, nonfinancial corporates, and households, especially after COVID-19. - Comparison of pre- and post-COVID-19 FSRs indicates changes in macroprudential policy and forward-looking stance. - IMF country teams should form independent views on systemic risk even when drawing on FSR analyses. ### II. SAMPLE AND METHODOLOGY — risks and sectoral coverage assessed - Time-varying and structural sources of systemic risks examined: - (i) credit risks - (ii) liquidity/funding risks - (iii) macroeconomic risk - (iv) mispricing/market risk - (v) solvency risk - (vi) contagion risks (cross-border, cross-sector, or within the financial system) - (vii) concentration risks - Inclusion criteria: - FSRs considered to cover these risks only if they provide clear assessment on systemic risk (including level and the direction of change), rather than only a description of recent developments. - Sectoral dimensions analyzed: - Banking sector - Nonbank financial institutions - Households - Nonfinancial corporates - Public sector - Additional risk areas taken stock of: - Risks related to cyber, technologies, and climate change. - Definition used for a “well-articulated view about systemic risk” (following IMF 2021): - Document includes a statement or view on any of the following: - (i) level of systemic risk, or its change; - (ii) the overall vulnerabilities in the financial system and its resilience to aggregate shocks; - (iii) how shocks could cause an impairment of all or parts of the financial system, which can cause serious negative consequences for the real economy (IMF/FSB/BIS 2009, Box 1). ### Box 1 — Financial Stability Reports (FSRs): role and characteristics - Observed evolution: - Number of jurisdictions publishing FSRs increased from less than ten in late 1990s to about 80 by mid-2000s, reaching close to 120 in 2020. - Typical features of FSRs: - Published annually or semi-annually by central banks or, in some cases, other agencies in charge of supervision or financial stability. - Coverage often includes domestic and global macrofinancial environment; developments and performance of financial markets and institutions; assessment of risks in and resilience of the financial sector; regulatory and supervisory developments. - Some reports take a topical approach with in-depth analysis of emerging vulnerabilities. - Banking sector tends to be the focus, but coverage of nonbank financial sector, households, and nonfinancial corporate sectors has been increasing. - Usefulness for IMF surveillance: - With focus on financial stability and macrofinancial linkages, FSRs provide useful resources for IMF bilateral surveillance to understand financial stability landscapes and identify areas for closer vulnerability assessment. ### Approaches and analytical toolkits used in FSRs - Four broad categories of approaches used by FSRs to identify systemic risks: - (i) stress tests, - (ii) indicator-based approaches, - (iii) other empirical analyses, - (iv) qualitative approaches. - Stress tests: - Typically test resilience of the banking sector to large negative shocks in terms of solvency and liquidity based on macro scenarios. - Some stress tests and sensitivity analyses apply to nonbank financial institutions, household and corporate sectors, and contagion analyses. - 84 percent of all the FSRs reviewed contains at least one stress test. - By country group: all AE FSRs reviewed contain at least one stress test; EMDE share is 75 percent. - High heterogeneity among stress tests in terms of type and magnitude of shocks and analytical complexity. - Indicator-based approaches: - Include heatmaps and composite indices of vulnerabilities by sector and market, composite indicators on financial conditions, systemic risk and market stress, and indicators on structural systemic risks (for instance, concentration and contagion risk). - Roughly 2/3 of both IMF Article IV staff reports and FSRs assessed used indicator-based approaches. - Indicator-based approaches help track changes over time but assessing the absolute level of risk can be difficult; composite indicators can mask divergent underlying signals. - Other empirical approaches: - Examples: financial conditions index and growth-at-risk (GaR), credit-to-GDP gaps and financial cycles, VAR models, quantile regressions, impulse-response estimates, filtering methods to identify credit booms and busts, network analysis. - More than a third of AE FSRs incorporate the growth-at-risk framework. - Around 40 percent of the AE Article IV staff reports reviewed draw on the conclusions of stress tests in FSRs. - Qualitative approaches: - Risk assessment matrices (RAMs), surveys of market participants and financial institutions, narrative discussions of amplification channels. - High share of FSRs employ at least one qualitative tool to assess systemic risk, including all AE FSRs reviewed. ### Comparative findings: FSRs versus IMF Article IV staff reports - Both FSRs and Article IV staff reports cover financial stability and policies, but they fulfill different purposes and differ in depth and emphasis. - Four main differences identified: - (i) presence of a well-articulated systemic risk assessment, - (ii) identification of risks to financial stability (time-varying and structural sources, and emerging risks such as cyber, technologies and climate change) and sectoral vulnerabilities, - (iii) discussion on the policy mix to mitigate systemic risk, - (iv) tools used to assess systemic risk. - Key comparative points: - All FSRs reviewed included a well-articulated view on systemic risk. - Unlike FSRs, IMF Article IV staff reports—particularly for EMDEs—tend to focus mainly on credit risk and vulnerabilities in the banking sector; most AE Article IV staff reports contained a well-articulated view on systemic risk. - FSRs cover a wider range of systemic risks and sectoral vulnerabilities than IMF Article IV staff reports. - For both AEs and EMDEs, FSRs are more likely than IMF Article IV staff reports to contain a discussion on the policy mix (monetary, fiscal, and macroprudential policies) needed to mitigate systemic risks. - The analytical toolkit is more frequently used in FSRs than in Article IVs, particularly in EMDEs. ### Examples and illustrative practices from FSRs - Composite systemic risk indicators: - Riksbank builds five sectoral indicators (household, nonfinancial corporate, banking, property market, external sector) by standardizing and aggregating underlying indicators; aggregates the five into a single overall systemic risk indicator. Subindices show sectoral contributions to overall systemic risk. - Advantages: easy to follow and visualize changes over time; helps identify contributing sectors. - Limitations: can under- or overestimate systemic risk in different phases and mask offsetting signals; may not capture interconnectedness, supervision, integrity, and market infrastructure vulnerabilities timely. - Treatment of macrofinancial linkages: - FSRs discuss global and domestic macrofinancial environment, policy interactions (e.g., government financing, housing), sector developments, specific vulnerabilities and spillovers. - COVID-19 increased focus on spillovers from harder-hit sectors to credit quality via loss of revenue and employment (Brazil, Chile, Germany, Hungary, Ireland, Romania, Sweden, Turkey). - Some FSRs use econometric models (VAR, quantile regression, impulse response, DSGE with financial modules, filtering methods) to quantify transmission channels. - Chile’s FSR quantifies two-way interlinkages between the real economy and the financial sector, including firm vulnerability measures and a calibrated DSGE with financial module. - Analytical work on NBFIs, corporates, and households: - NBFIs: stress tests are less common and more ad-hoc; examples include India (cooperative banks, nonbank lenders), Korea (Systemic Risk Assessment Model covering six sectors), Canada (bond mutual funds interest-rate stress), Italy (EIOPA insurance stress tests), Germany (investment fund sector stress tests), Malaysia (qualitative pandemic impact). - Network analysis: used to capture interconnectedness (Cambodia, Korea). - Emerging risks: Singapore’s 2019 FSR includes cyber risk stress tests for banks and insurers; Germany’s FSR surveys show many institutions not yet factoring climate-related risks. - Nonfinancial corporates: stress tests and reverse stress tests on corporates (Singapore); Brazil applies COVID-19 corporate shock propagation to bank capital via interconnections; Korea and Japan run corporate stress tests with sectoral sales shocks. - Households: scenario-based stress tests and sensitivity analyses for housing-price declines, unemployment, interest-rate rises (Australia, Hungary, Sweden, Chile, Korea, Thailand, Malaysia). - Macroprudential policy communication and advice: - FSRs used by central banks to communicate macroprudential policy decisions and rationale where they have authority; used to give policy advice where they do not. - Illustrative example of macroprudential decision change (pre- and post-COVID): - Pre-COVID-19: Maintenance of Countercyclical Capital Buffer (CCyB) rate at 1%. - Post-COVID-19: Reduction of CCyB rate to 0%. - Forward-looking guidance: pre-COVID central bank “stands ready to adjust CCyB in either direction as appropriate.” Post-COVID guidance: “No increase in CCyB to be announced in Q1-21, at the earliest.” - Illustrative example of macroprudential advice change where central bank does not set macroprudential policy: - Pre-COVID-19: If housing and tax policy measures are not implemented and debt increases at a faster rate, macroprudential policy measures may need to be tightened. - Post-COVID-19: Further measures (fiscal, monetary and macroprudential) may be needed to support credit supply and safeguard financial stability; macroprudential policy easing necessary to improve banks’ ability to supply credit to households and firms; support measures may lead to moral hazard if maintained indefinitely. - Post-COVID-19 recommendations stress that effectiveness of macroprudential policy can be strengthened if accompanied by appropriate fiscal and monetary policies. ### Practical implications and recommended uses for IMF country teams - FSRs can serve as supplementary material to complement IMF country teams’ analyses of systemic risk, especially where granular or confidential data are not publicly available. - Suggested FSR-derived approaches for Article IV Consultations: - Use composite indicators employed in FSRs to gauge evolution and identify potential sources of systemic risks. - Leverage empirical analyses in FSRs (e.g., vector autoregression models) to quantify transmission paths and magnitude of macrofinancial impacts for forward-looking assessment. - Incorporate stress tests of nonbank financial institutions, nonfinancial corporates, and households into systemic risk assessments where FSRs provide such analysis. - Draw on FSRs for communication and explanation of macroprudential policy decisions and assessments of policy effectiveness. - Caveat: - IMF country teams should form independent views on systemic risk even when drawing on analyses in FSRs, acknowledging differences in focus and perspective between FSRs (central bank assessments) and IMF Article IV staff reports (broader macroeconomic and policy coverage reflecting IMF staff and country authorities). ### Box 2. Definitions of Systemic Risk and Financial Stability - IMF/FSB/BIS (2009) definition of systemic risk: a risk of disruption to financial services that is (i) caused by an impairment of all or parts of the financial system and (ii) has the potential to have serious negative consequences for the real economy. The disruption could result from shocks originating from within the financial system, or from outside the financial system that impact on it; and have significant spillovers to the real economy. - FSRs do not always provide clear definition of financial stability. Čihák and others (2012) found financial stability is defined consistently in half the cases in their study of eight jurisdictions. Lim and others (2017) found the majority of FSRs from 20 countries in Latin America and the Caribbean do not provide a definition of financial stability. - When defined, financial stability tends to relate to the financial sector’s role to intermediate funds, promote an efficient allocation of resources, and contribute to macroeconomic stability and growth; in some cases the definition includes resilience to shocks. - Country examples of definitions in FSRs: - Brazil: “The BCB defines financial stability as the regular operation, over time and in any economic scenario, of the system responsible for the financial intermediation among households, nonfinancial corporations and the government” (Banco Central do Brasil 2019). - Chile: “The Central Bank’s focus in the area of financial stability is centered mainly on the well-functioning of the system and the Chilean economy’s access to international financial markets. In this context, financial stability is said to exist when the financial system is able to operate normally or without significant disruptions, even in the face of adverse situations.” (Banco Central de Chile 2020). - Ireland: “A resilient financial system is one that is able to provide services to Irish households and businesses, both in good times and in bad. The Central Bank’s policy actions seek to ensure that the financial system is able to absorb, rather than amplify, adverse shocks” (Central Bank of Ireland 2019). - Korea: “Financial stability refers to a condition in which the financial system works smoothly with all of its key components satisfactorily performing their roles: financial institutions carrying out their financial intermediary functions, market participants maintaining a high level of confidence in their financial market, and the financial infrastructure being well developed” (Bank of Korea 2019). - South Africa: “Financial stability is not an end in itself but is regarded as an important precondition for sustainable economic growth and employment creation. Financial stability refers to a financial system that espouses confidence through its resilience to systemic risks and its ability to efficiently intermediate funds”, (South African Reserve Bank 2019). - Sample and scope of review: - Sample of FSRs examined: FSRs published by central banks in 32 jurisdictions, comprising 12 advanced economies (AEs) and 20 emerging market and developing economies (EMDEs). - Reviewed the latest available FSRs as of mid-2020; examined more recent FSRs when feasible for comparison and consistency. ### Conclusions and implications for IMF surveillance - COVID-19 and the global financial crisis highlighted strong interlinkages and feedback loops between the financial sector and the real economy. - Progress has been made in enhancing macrofinancial analysis in IMF Article IV staff reports, but constraints remain due to scope of Article IVs, data availability, and resource limitations. - FSRs offer comprehensive, granular analyses that Article IV teams can draw on, especially where supervisory or granular data are not publicly accessible. - Findings from the review: - All FSRs reviewed include a well-articulated view on systemic risk. - FSRs more often cover a wider range of risks and vulnerabilities and discuss macroeconomic policy mix and interactions than Article IV staff reports. - FSRs use a greater variety of analytical tools, including stress tests, indicator-based analyses, empirical models, and qualitative approaches. - Cross-fertilization exists: Article IV staff reports draw on FSR analyses (e.g., stress tests), and FSRs adopt IMF tools (e.g., growth-at-risk). - Policy-relevant implications: - IMF Article IV surveillance can consider adapting selected FSR analytical examples to enhance assessment of vulnerabilities beyond the banking sector. - Country teams should form independent views on systemic risk even when drawing on FSR analyses. - Suggested directions for further research: - Assess whether changes in central bank assessment on systemic risk are reflected in central bank communication tone (e.g., via text mining). - Examine whether central banks rely primarily on macroprudential tools or deploy a broader policy mix (monetary, fiscal, exchange rate, capital flow measures). - Study how and to what extent systemic risk is quantified in macrofinancial surveillance given measurement challenges. *Source: wpiea2021200-print-pdf - References (excerpted content).* ### References ............................................................................................................. ### wpiea2021200-print-pdf - References ### I. INTRODUCTION — purpose and motivation - The COVID-19 pandemic demonstrates that sudden and deep recessions can threaten financial stability and highlights the importance of analyzing macrofinancial linkages in macroeconomic surveillance. - Growth in publication of Financial Stability Reports (FSRs): - The number of jurisdictions publishing FSRs rose to close to 120 in 2020, from less than ten in the late 1990s. - IMF initiatives and evaluations referenced: - Staff Guidance Notes on Macroprudential Policy (IMF 2014a). - Mainstreaming Macrofinancial Initiative (started with 24 pilot jurisdictions in 2015; expanded to 67 and 128 jurisdictions in 2016 and 2017, respectively, and the full membership in 2018). - IMF Independent Evaluation Office (IEO) evaluation of IMF financial surveillance in 2019 (found progress but called for further improvement). - IMF Policy Paper on Systemic Risk and Macroprudential Policy Advice in Article IV Consultations (IMF 2021) (found significant, but uneven, progress and called for expanding the pool of macrofinancial talent). - Rationale for the paper: - Broad availability of high-quality FSRs can support IMF efforts to strengthen macrofinancial surveillance across the membership. - FSAP assessments provide comprehensive financial sector examinations but are typically done only once in 5 or more years and concentrate on a subset of membership; they are data and resource intensive and often rely on confidential supervisory data. - Therefore, IMF country teams often rely on external research—including FSRs—to form views on systemic risk. ### Comparative scope and main research questions - Primary objective: examine IMF Article IV staff reports and FSRs for 32 jurisdictions to assess differences in systemic risk analysis and identify opportunities to expand IMF country teams’ toolkit for systemic risk assessment. - Central questions: - Whether FSRs and IMF Article IV staff reports contain a clear statement on systemic risk. - How systemic risks and vulnerabilities are identified. - How macrofinancial linkages are discussed. - Key findings summarized in the introduction: - Unlike IMF Article IV staff reports, all reviewed FSRs include a well-articulated view on systemic risk (as defined in Section II). - FSRs cover a wider range of systemic risks and vulnerabilities and discuss the macroeconomic policy mix (monetary, fiscal, and macroprudential policy) more than Article IV staff reports. - FSRs rely more on analytical tools such as banks’ stress tests and growth-at-risk to assess systemic risk than IMF Article IV staff reports. - Cross-fertilization: some IMF Article IV staff reports use stress test results published in FSRs; some FSRs use growth-at-risk—first used in the Global Financial Stability Report (IMF 2017b). - FSRs conduct stress tests for nonbank financial institutions, nonfinancial corporates, and households, especially after COVID-19. - Comparison of pre- and post-COVID-19 FSRs indicates changes in macroprudential policy and forward-looking stance. - IMF country teams should form independent views on systemic risk even when drawing on FSR analyses. ### II. SAMPLE AND METHODOLOGY — risks and sectoral coverage assessed - Focus: discussion of systemic risks and vulnerabilities and analytical tools used in FSRs. - Time-varying and structural sources of systemic risks examined: - (i) credit risks - (ii) liquidity/funding risks - (iii) macroeconomic risk - (iv) mispricing/market risk - (v) solvency risk - (vi) contagion risks (cross-border, cross-sector, or within the financial system) - (vii) concentration risks - Inclusion criteria: FSRs considered to cover these risks only if they provide clear assessment on systemic risk (including level and the direction of change), rather than only a description of recent developments. - Sectoral dimensions analyzed: - Banking sector - Nonbank financial institutions - Households - Nonfinancial corporates - Public sector - Additional risk areas taken stock of: - Risks related to cyber, technologies, and climate change. - Definition used for a “well-articulated view about systemic risk” (following IMF 2021): - Document includes a statement or view on any of the following: - (i) level of systemic risk, or its change; - (ii) the overall vulnerabilities in the financial system and its resilience to aggregate shocks; - (iii) how shocks could cause an impairment of all or parts of the financial system, which can cause serious negative consequences for the real economy (IMF/FSB/BIS 2009, Box 1). ### Box 1 — Financial Stability Reports (FSRs): role and characteristics - Observed evolution: - Number of jurisdictions publishing FSRs increased from less than ten in late 1990s to about 80 by mid-2000s, reaching close to 120 in 2020. - Typical features of FSRs: - Published annually or semi-annually by central banks or, in some cases, other agencies in charge of supervision or financial stability. - Coverage often includes: - Domestic and global macrofinancial environment. - Developments and performance of financial markets and institutions. - Assessment of risks in and resilience of the financial sector. - Regulatory and supervisory developments. - Some reports take a topical approach with in-depth analysis of emerging vulnerabilities. - Banking sector tends to be the focus, but coverage of nonbank financial sector, households, and nonfinancial corporate sectors has been increasing. - Usefulness for IMF surveillance: - With focus on financial stability and macrofinancial linkages, FSRs provide useful resources for IMF bilateral surveillance to understand financial stability landscapes and identify areas for closer vulnerability assessment. ### Practical implications and recommended uses for IMF country teams - FSRs can serve as supplementary material to complement IMF country teams’ analyses of systemic risk, especially where granular or confidential data are not publicly available. - Suggested FSR-derived approaches for Article IV Consultations: - Use composite indicators employed in FSRs to gauge evolution and identify potential sources of systemic risks. - Leverage empirical analyses in FSRs (e.g., vector autoregression models) to quantify transmission paths and magnitude of macrofinancial impacts for forward-looking assessment. - Incorporate stress tests of nonbank financial institutions, nonfinancial corporates, and households into systemic risk assessments where FSRs provide such analysis. - Draw on FSRs for communication and explanation of macroprudential policy decisions and assessments of policy effectiveness. - Caveat: - IMF country teams should form independent views on systemic risk even when drawing on analyses in FSRs, acknowledging differences in focus and perspective between FSRs (central bank assessments) and IMF Article IV staff reports (broader macroeconomic and policy coverage reflecting IMF staff and country authorities). *Source: wpiea2021200-print-pdf - References (excerpted content).* ### Box 2. Definitions of Systemic Risk and Financial Stability ### Box 2. Definitions of Systemic Risk and Financial Stability ### Definitions and conceptual framing - IMF/FSB/BIS (2009) definition of systemic risk: a risk of disruption to financial services that is (i) caused by an impairment of all or parts of the financial system and (ii) has the potential to have serious negative consequences for the real economy. The disruption could result from shocks originating from within the financial system, or from outside the financial system that impact on it; and have significant spillovers to the real economy. - FSRs do not always provide clear definition of financial stability. Čihák and others (2012) found financial stability is defined consistently in half the cases in their study of eight jurisdictions. Lim and others (2017) found the majority of FSRs from 20 countries in Latin America and the Caribbean do not provide a definition of financial stability. - When defined, financial stability tends to relate to the financial sector’s role to intermediate funds, promote an efficient allocation of resources, and contribute to macroeconomic stability and growth; in some cases the definition includes resilience to shocks. - Country examples of definitions in FSRs: - Brazil: “The BCB defines financial stability as the regular operation, over time and in any economic scenario, of the system responsible for the financial intermediation among households, nonfinancial corporations and the government” (Banco Central do Brasil 2019). - Chile: “The Central Bank’s focus in the area of financial stability is centered mainly on the well-functioning of the system and the Chilean economy’s access to international financial markets. In this context, financial stability is said to exist when the financial system is able to operate normally or without significant disruptions, even in the face of adverse situations.” (Banco Central de Chile 2020). - Ireland: “A resilient financial system is one that is able to provide services to Irish households and businesses, both in good times and in bad. The Central Bank’s policy actions seek to ensure that the financial system is able to absorb, rather than amplify, adverse shocks” (Central Bank of Ireland 2019). - Korea: “Financial stability refers to a condition in which the financial system works smoothly with all of its key components satisfactorily performing their roles: financial institutions carrying out their financial intermediary functions, market participants maintaining a high level of confidence in their financial market, and the financial infrastructure being well developed” (Bank of Korea 2019). - South Africa: “Financial stability is not an end in itself but is regarded as an important precondition for sustainable economic growth and employment creation. Financial stability refers to a financial system that espouses confidence through its resilience to systemic risks and its ability to efficiently intermediate funds”, (South African Reserve Bank 2019). ### Sample and scope of review - Sample of FSRs examined: FSRs published by central banks in 32 jurisdictions, comprising 12 advanced economies (AEs) and 20 emerging market and developing economies (EMDEs). - Reviewed the latest available FSRs as of mid-2020; examined more recent FSRs when feasible for comparison and consistency. ### Approaches and analytical toolkits used in FSRs - Four broad categories of approaches used by FSRs to identify systemic risks: - (i) stress tests, - (ii) indicator-based approaches, - (iii) other empirical analyses, - (iv) qualitative approaches. - Stress tests: - Typically test resilience of the banking sector to large negative shocks in terms of solvency and liquidity based on macro scenarios. - Some stress tests and sensitivity analyses apply to nonbank financial institutions, household and corporate sectors, and contagion analyses. - 84 percent of all the FSRs reviewed contains at least one stress test. - By country group: all AE FSRs reviewed contain at least one stress test; EMDE share is 75 percent. - There is high heterogeneity among stress tests in terms of type and magnitude of shocks and analytical complexity. - Indicator-based approaches: - Include heatmaps and composite indices of vulnerabilities by sector and market, composite indicators on financial conditions, systemic risk and market stress, and indicators on structural systemic risks (for instance, concentration and contagion risk). - Roughly 2/3 of both IMF Article IV staff reports and FSRs assessed used indicator-based approaches. - Indicator-based approaches help track changes over time but assessing the absolute level of risk can be difficult; composite indicators can mask divergent underlying signals. - Other empirical approaches: - Examples: financial conditions index and growth-at-risk (GaR), credit-to-GDP gaps and financial cycles, VAR models, quantile regressions, impulse-response estimates, filtering methods to identify credit booms and busts, network analysis. - More than a third of AE FSRs incorporate the growth-at-risk framework. - Around 40 percent of the AE Article IV staff reports reviewed draw on the conclusions of stress tests in FSRs. - Qualitative approaches: - Risk assessment matrices (RAMs), surveys of market participants and financial institutions, narrative discussions of amplification channels. - High share of FSRs employ at least one qualitative tool to assess systemic risk, including all AE FSRs reviewed. ### Comparative findings: FSRs versus IMF Article IV staff reports - Both FSRs and Article IV staff reports cover financial stability and policies, but they fulfill different purposes and differ in depth and emphasis. - Four main differences identified: - (i) presence of a well-articulated systemic risk assessment, - (ii) identification of risks to financial stability (time-varying and structural sources, and emerging risks such as cyber, technologies and climate change) and sectoral vulnerabilities, - (iii) discussion on the policy mix to mitigate systemic risk, - (iv) tools used to assess systemic risk. - Key comparative points: - All FSRs reviewed included a well-articulated view on systemic risk. - Unlike FSRs, IMF Article IV staff reports—particularly for EMDEs—tend to focus mainly on credit risk and vulnerabilities in the banking sector; most AE Article IV staff reports contained a well-articulated view on systemic risk. - FSRs cover a wider range of systemic risks and sectoral vulnerabilities than IMF Article IV staff reports. - For both AEs and EMDEs, FSRs are more likely than IMF Article IV staff reports to contain a discussion on the policy mix (monetary, fiscal, and macroprudential policies) needed to mitigate systemic risks. - The analytical toolkit is more frequently used in FSRs than in Article IVs, particularly in EMDEs. ### Examples and illustrative practices from FSRs - Composite systemic risk indicators: - Riksbank example: builds five sectoral indicators (household, nonfinancial corporate, banking, property market, external sector) by standardizing and aggregating underlying indicators; aggregates the five into a single overall systemic risk indicator. Subindices show sectoral contributions to overall systemic risk. - Advantages: easy to follow and visualize changes over time; helps identify contributing sectors. Limitations: can under- or overestimate systemic risk in different phases and mask offsetting signals; may not capture interconnectedness, supervision, integrity, and market infrastructure vulnerabilities timely. - Treatment of macrofinancial linkages: - FSRs discuss global and domestic macrofinancial environment, policy interactions (e.g., government financing, housing), sector developments, specific vulnerabilities and spillovers. - COVID-19 increased focus on spillovers from harder-hit sectors to credit quality via loss of revenue and employment (Brazil, Chile, Germany, Hungary, Ireland, Romania, Sweden, Turkey). - Some FSRs use econometric models (VAR, quantile regression, impulse response, DSGE with financial modules, filtering methods) to quantify transmission channels. - Chile’s FSR quantifies two-way interlinkages between the real economy and the financial sector, including firm vulnerability measures and a calibrated DSGE with financial module. - Analytical work on nonbank financial institutions (NBFIs), corporates, and households: - NBFIs: stress tests are less common and more ad-hoc; examples include India (cooperative banks, nonbank lenders), Korea (Systemic Risk Assessment Model covering six sectors), Canada (bond mutual funds interest-rate stress), Italy (EIOPA insurance stress tests), Germany (investment fund sector stress tests), Malaysia (qualitative pandemic impact). - Network analysis: used to capture interconnectedness (Cambodia, Korea). - Emerging risks: Singapore’s 2019 FSR includes cyber risk stress tests for banks and insurers; Germany’s FSR surveys show many institutions not yet factoring climate-related risks. - Nonfinancial corporates: stress tests and reverse stress tests on corporates (Singapore); Brazil applies COVID-19 corporate shock propagation to bank capital via interconnections; Korea and Japan run corporate stress tests with sectoral sales shocks. - Households: scenario-based stress tests and sensitivity analyses for housing-price declines, unemployment, interest-rate rises (Australia, Hungary, Sweden, Chile, Korea, Thailand, Malaysia). - Macroprudential policy communication and advice: - FSRs used by central banks to communicate macroprudential policy decisions and rationale where they have authority; used to give policy advice where they do not. - Illustrative example of macroprudential decision change (pre- and post-COVID): - Pre-COVID-19: Maintenance of Countercyclical Capital Buffer (CCyB) rate at 1%. - Post-COVID-19: Reduction of CCyB rate to 0%. - Forward-looking guidance: pre-COVID central bank “stands ready to adjust CCyB in either direction as appropriate.” Post-COVID guidance: “No increase in CCyB to be announced in Q1-21, at the earliest.” - Illustrative example of macroprudential advice change where central bank does not set macroprudential policy: - Pre-COVID-19: If housing and tax policy measures are not implemented and debt increases at a faster rate, macroprudential policy measures may need to be tightened. - Post-COVID-19: Further measures (fiscal, monetary and macroprudential) may be needed to support credit supply and safeguard financial stability; macroprudential policy easing necessary to improve banks’ ability to supply credit to households and firms; support measures may lead to moral hazard if maintained indefinitely. - Post-COVID-19 recommendations stress that effectiveness of macroprudential policy can be strengthened if accompanied by appropriate fiscal and monetary policies. ### Conclusions and implications for IMF surveillance - COVID-19 and the global financial crisis highlighted strong interlinkages and feedback loops between the financial sector and the real economy. - Progress has been made in enhancing macrofinancial analysis in IMF Article IV staff reports, but constraints remain due to scope of Article IVs, data availability, and resource limitations. - FSRs offer comprehensive, granular analyses that Article IV teams can draw on, especially where supervisory or granular data are not publicly accessible. - Findings from the review: - All FSRs reviewed include a well-articulated view on systemic risk. - FSRs more often cover a wider range of risks and vulnerabilities and discuss macroeconomic policy mix and interactions than Article IV staff reports. - FSRs use a greater variety of analytical tools, including stress tests, indicator-based analyses, empirical models, and qualitative approaches. - Cross-fertilization exists: Article IV staff reports draw on FSR analyses (e.g., stress tests), and FSRs adopt IMF tools (e.g., growth-at-risk). - Policy-relevant implications: - IMF Article IV surveillance can consider adapting selected FSR analytical examples to enhance assessment of vulnerabilities beyond the banking sector. - Country teams should form independent views on systemic risk even when drawing on FSR analyses. - Suggested directions for further research: - Assess whether changes in central bank assessment on systemic risk are reflected in central bank communication tone (e.g., via text mining). - Examine whether central banks rely primarily on macroprudential tools or deploy a broader policy mix (monetary, fiscal, exchange rate, capital flow measures). - Study how and to what extent systemic risk is quantified in macrofinancial surveillance given measurement challenges. *Source: Box 2. Definitions of Systemic Risk and Financial Stability — wpiea2021200-print-pdf* ### REFERENCES ### REFERENCES ### Listed references - Banca d’Italia, 2019, “Financial Stability Report, 2”, November 2019. - ———, 2020, “Financial Stability Report, 1”, April 2020. - Banco Central de Chile, 2019, “Financial Stability Report – Second Semester 2019”. - ———, 2020, “Financial Stability Report – First Semester 2020”. - Banco de México, 2019, “Financial Stability Report”, Second Half 2019. - ———, 2020, “Financial Stability Report”, First Half 2020. - Banco de la República, 2019, “Financial Stability Report”, Second Half 2019. - ———, 2020, “Financial Stability Report”, Second Half 2020. - Banco Central do Brasil, 2019, “Financial Stability Report”, Volume 18, Issue No.2, October 2019. - ———, 2020, “Financial Stability Report”, Volume 19, Issue No.1, April 2020. - Bangladesh Bank, 2019, “Financial Stability Report, 2019”, Issue 10. - Bank Indonesia, 2019, “Financial System Review”, No. 33, September 2019. - ———, 2020, “Financial System Review”, No. 34, March 2020. - Bank Negara Malaysia, 2019, “Financial Stability Review – Second Half 2019”. - ———, 2020, “Financial Stability Review – First Half 2020.” - Bank of Canada, 2019, “Financial System Review—2019.” - ———, 2020, “Financial System Review―2020.” - Bank of Ghana, 2020, “Banking Sector Report”, March 2020. - Bank of Japan, 2019, “Financial System Report”, October 2019. - ———, 2020, “Financial System Report”, April 2020. - ———, 2020, “Financial System Report”, October 2020. - Bank of Korea, 2019, “Financial Stability Report”, December 2019. - ———, 2020, “Financial Stability Report”, June 2020. - Bank of Mauritius, 2019, “Financial Stability Report”, October 2019. - ———, 2020, “Financial Stability Report”, June 2020. - Bank of Russia, 2020, “Financial Stability Review”, Q4 2019 – Q1 2020.no - ———, 2020, “Financial Stability Report”, Q2 – Q3 2020. - Bank of Thailand, 2019, “Financial Stability Report, 2019”. - Born, Benjamin, Michael Ehrmann, and Marcel Fratzscher, 2014, “Central Bank Communication and Financial Stability”, The Economic Journal, June 2014, Vol. 124, No. 577, pp. 701-734, Oxford University Press. - Cecchetti, G. Stephen, Tommaso Mancini-Griffoli, Machiko Narita, and Ratna Sahay, 2020, “U.S. or Domestic Monetary Policy: Which Matters More for Financial Stability?” IMF Economic Review. 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Klemm, Sumiko Ogawa, Marco Pani, and Claudio Visconti, 2017, “Financial Stability Reports in Latin America and The Caribbean”, IMF Working Paper WP/17/73, (Washington: International Monetary Fund). - Magyar Nemzeti Bank, 2019, “Financial Stability Report”, December 2019. - ———, 2020, “Financial Stability Report”, May 2020. - Monetary Authority of Singapore, 2019, “Financial Stability Review”, November 2019. - ———, 2020, “Financial Stability Review”, December 2020. - National Bank of Cambodia, 2019, “Financial Stability Review, 2019”. - National Bank of Romania, 2019, “Financial Stability Report, December 2019”, Year IV (XIV), No. 8 (18), New Series. - ———, 2020, “Financial Stability Report, June 2020”, Year V (XV), No. 9 (19), New Series. - National Bank of Rwanda, 2019, “A Macro-Prudential Policy Framework for the National Bank of Rwanda”, March 2019. - ———, 2019, “Annual Financial Stability Report, July 2018-June 2019”. - Reserve Bank of Australia, 2019, “Financial Stability Review”, October 2019. - ———, 2020, “Financial Stability Review”, April 2020. - Reserve Bank of India, 2019, “Financial Stability Report”, Issue No. 20, December 2019. - ———, 2020, “Financial Stability Report”, Issue No. 21, July 2020. - Saudi Arabian Monetary Authority, 2019, “Financial Stability Report”. - ———, 2020, “Financial Stability Report”. - South African Reserve Bank, 2019, “Financial Stability Review”, Second Edition, November 2019. - ———, 2020, “Financial Stability Review”, Second Edition, May 2020. - Sveriges Riksbank, 2019, “Financial Stability Report, 2019:2”. - ———, 2020, “Financial Stability Report, 2020: 1”. - Swiss National Bank, 2019, “Financial Stability Report, 2019”. - ———, 2020, “Financial Stability Report, 2020”. *Source: wpiea2021200-print-pdf - REFERENCES* --- _Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021200-print-pdf.pdf_