Sovereign Risk in Macroprudential Solvency Stress Testing

Author/Editor:

Andreas A. Jobst ; Hiroko Oura

Publication Date:

December 6, 2019

Electronic Access:

Download PDF. Use the free Adobe Acrobat Reader to view this PDF file

Link to data for this title

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper explains the treatment of sovereign risk in macroprudential solvency stress testing, based on the experiences in the Financial Sector Assessment Program (FSAP). We discuss four essential steps in assessing the system-wide impact of sovereign risk: scope, loss estimation, shock calibration, and capital impact calculation. Most importantly, a market-consistent valuation approach lies at the heart of assessing the resilience of the financial sector in a tail risk scenario with sovereign distress. We present a flexible, closed-form approach to calibrating haircuts based on changes in expected sovereign defaults affecting bank solvency during adverse macroeconomic conditions. This paper demonstrates the effectiveness of using extreme value theory (EVT) in this context, with empirical examples from past FSAPs.

Series:

Working Paper No. 19/266

Subject:

English

Publication Date:

December 6, 2019

ISBN/ISSN:

9781513519968/1018-5941

Stock No:

WPIEA2019266

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

59

Please address any questions about this title to publications@imf.org