Sweden: Financial Sector Assessment Program Update: Technical Note on Contingent Claims Analysis Approach to Measure Risk and Stress Test the Swedish Banking Sector
IMF Staff Country Reports, September 16, 2011
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- Sweden: Financial Sector Assessment Program Update: Technical Note on Contingent Claims Analysis Approach to Measure Risk and Stress Test the Swedish Banking Sector
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Bibliographic details
- Published: September 16, 2011
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781463903572.002
Summary and purpose
- Describes the application of contingent claims analysis (CCA) and systemic CCA to the top four commercial banks in Sweden.
- Complements balance sheet stress tests for four major banks with tests based on the CCA framework, a risk-adjusted balance sheet relating bank asset values to equity value, default risk, and bank funding costs.
- Concludes that banks are found to be resilient to shocks, while noting that more work on systemic risk models could help analyze systemic risk under stress scenarios.
Methodology
- Uses contingent claims analysis (CCA) and systemic CCA applied to the top four commercial banks in Sweden.
- Constructs a risk-adjusted balance sheet that links bank asset values to equity value, default risk, and bank funding costs.
- Complements traditional balance sheet stress-testing approaches with CCA-based tests.
Main findings
- Banks are found to be resilient to shocks based on the CCA and systemic CCA assessments applied.
- Despite resilience in results, the analysis highlights the need for further work on systemic risk models to better analyze systemic risk under stress scenarios.
Policy implications and recommendations
- Strengthen development and application of systemic risk models to analyze banking-sector vulnerabilities under stress scenarios.
- Use CCA and systemic CCA as complementary tools alongside balance sheet stress tests to capture market-based measures of default risk and funding costs.