Republic of Korea: Financial Sector Assessment Program-Stress Testing And Financial Stability Analysis-Technical Note
IMF Staff Country Reports, January 9, 2015
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Bibliographic details
- Published: January 9, 2015
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781484367810.002
Overview
- The financial stability assessment under the Financial Sector Assessment Program (FSAP) for Korea was carried out in close collaboration with the authorities.
- The assessment included top-down (TD) and bottom-up (BU) stress testing of Korea’s commercial banks and certain non-bank depository institutions (NBDIs); and evaluation of the potential contagion across banks (stemming both from funding pressures and potential defaults).
- The FSAP team did not have access to confidential supervisory data for the stress tests and the contagion analyses. The analyses were therefore carried out by the authorities in cooperation with participating banks, with the FSAP team performing extensive methodological and estimation validations of the results.
- All stress tests were based on assumptions and parameters agreed between the authorities and the FSAP team.
Stress testing methodology
- Solvency analysis:
- Top-down tests were based on the internal Systemic Risk Assessment Model for Macroprudential Policy (SAMP) developed by the Bank of Korea (BOK).
- TD solvency tests were complemented by macroeconomic projections from the BOK’s macroeconomic model.
- Bottom-up tests were carried out by individual banks to supplement the TD analysis.
- Liquidity analysis:
- Top-down tests were carried out by the Financial Supervisory Service (FSS).
- Separate assessments were made of banks’ local currency and foreign exchange (FX) liquidity risks.
- Bottom-up liquidity tests were performed by individual banks and were based on a different set of assumptions on potential liquidity outflows.
Key findings and assessment features
- Coverage:
- Commercial banks and certain non-bank depository institutions (NBDIs) were included in the stress testing exercise.
- Contagion analysis:
- The assessment evaluated potential contagion across banks stemming from funding pressures and potential defaults.
- Data and collaboration constraints:
- The FSAP team lacked access to confidential supervisory data for stress tests and contagion analyses; this practice is noted as occurring in other FSAPs as well.
- Results relied on cooperation between the authorities and participating banks, with FSAP methodological and estimation validation.
- Modeling and assumptions:
- The SAMP model and the BOK macroeconomic model underpinned TD solvency testing.
- FSS conducted TD liquidity testing with distinct treatment of local currency and FX liquidity risks.
- BU tests used alternative assumptions, particularly for liquidity outflows.
- All tests used assumptions and parameters agreed between the authorities and the FSAP team.