Rules of Thumb for Bank Solvency Stress Testing

IMF Working Papers, November 11, 2013

Source details

Rules of thumb are proposed for the behavior of banks’ capital ratios and key drivers—primarily credit losses, income, credit growth, and risk weights—in advanced and emerging economies.
The rules are designed for use under more or less severe stress conditions.
The proposed rules imply disproportionate responses to large shocks.
These rules can be used to quantify the cyclical behaviour of capital ratios under various regulatory approaches.
Subject areas: Banking; Capital adequacy requirements; Credit; Credit ratings; Financial regulation and supervision; Financial sector policy and analysis; Money; National accounts; Personal income; Stress testing.

Capital ratios respond to four primary drivers: credit losses, income, credit growth, and risk weights.
Rules of thumb facilitate quick, robust, and readily interpretable bank stress tests across advanced and emerging economies.
Under large shocks, responses are disproportionate (nonlinear/disproportionate behavior emphasized).
Rules of thumb enable quantification of cyclical behaviour of capital ratios under different regulatory frameworks.

Use rules of thumb to conduct rapid solvency stress tests when detailed models are impractical.
Apply the rules across jurisdictional contexts (advanced and emerging economies) and across stress severities.
Employ the rules to compare cyclical outcomes of capital ratios under alternative regulatory approaches.

Authors: Daniel C Hardy, Christian Schmieder
Date: November 11, 2013
Series: Working Paper No. 2013/232
Issue: 232
Volume: 2013
Pages: 67
DOI: https://doi.org/10.5089/9781475518115.001
Stock No: WPIEA2013232
ISBN: 9781475518115
ISSN: 1018-5941
Citation format (Chicago) provided on the page: Daniel C Hardy, and Christian Schmieder. "Rules of Thumb for Bank Solvency Stress Testing", IMF Working Papers 2013, 232 (2013), accessed 9/18/2026, https://doi.org/10.5089/9781475518115.001
Keywords listed: A. bank characteristic, AC bank, Asia and Pacific, bank capitalization, bank management, bank solvency, bank solvency stress tests, bank stability, Capital adequacy requirements, Central and Eastern Europe, Credit, Credit ratings, customer loan, default rate, EC bank, Europe, Global, growth rate, IRB bank, loss rate, net income, operating expenses, Personal income, profit and loss account, rules of thumb, Stress testing, Western Europe, WP

IMF Working Papers — Rules of Thumb for Bank Solvency Stress Testing (Working Paper No. 2013/232)