Market-Based Structural Top-Down Stress Tests of the Banking System
IMF Working Papers, April 10, 2013
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Bibliographic details
- Authors: Jorge A Chan-Lau
- Published: April 10, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484306314.001
Overview and motivation
- Top-down stress tests are increasingly needed for assessing financial institutions.
- Performing top-down stress tests is challenging because of the absence of granular information on banks’ trading and loan portfolios.
- The paper presents a market-based structural top-down stress testing methodology that addresses these data shortcomings by relying on market-based measures and structural default models.
Methodology
- Relies on market-based measures of a bank's probability of default.
- Uses structural models of default risk to infer capital losses that banks could experience under stress scenarios.
- The methodology allows inference of capital losses without requiring granular portfolio-level data.
Application and illustration
- The methodology is applied to a set of banks in an advanced emerging market economy (illustration described in the paper).
Key findings and contributions
- Demonstrates a feasible approach to top-down stress testing when granular portfolio data are unavailable.
- Shows how market prices and market-based probability of default measures can be mapped into estimated capital losses via structural default models.
- Provides a practical framework for regulators and analysts to perform system-wide stress assessments using market information.
Subjects and thematic coverage
- Banking
- Capital adequacy requirements
- Debt default
- External debt
- Financial regulation and supervision
- Financial sector policy and analysis
- Stress testing
Keywords (as provided)
- bank, bank analyst, banks, banks in the sample, banks' projection, Capital adequacy requirements, capital plans bank, Debt default, default, default risk, Global, IMF-World Bank FSAP, market, market estimate, market prices, market risk factors, probability of default, result, stress test methodology, Stress testing, Stress tests, structural models, systemic risk, WP