{ "title": "The Need for \"Un-consolidating\" Consolidated Banks' Stress Tests", "publication": "IMF Working Papers, December 6, 2012", "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151", "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151", "overlayPath": "/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151/index.md", "summary": "The recent crisis has spurred the use of stress tests as a (crisis) management and early warning tool. However, a weakness is that they omit potential risks embedded in the banking groups’ geographical structures by assuming that capital and liquidity are available wherever they are needed within th", "sections": [ { "heading": "Summary and core argument", "content": "- The recent crisis has spurred the use of stress tests as a (crisis) management and early warning tool.\n- A key weakness of current consolidated stress tests is the assumption that capital and liquidity are available wherever they are needed within the banking group.\n- That assumption neglects:\n - that regulations differ across countries (e.g., minimum capital requirements), and\n - that home/host regulators might limit flows of capital or liquidity within a group during periods of stress.\n- The study presents a framework to integrate limits on intragroup flows into stress tests and provides illustrative calculations for banks included in the June 2011 EBA stress tests." }, { "heading": "Framework and methodological approach", "content": "- Presents a framework on how to integrate the risk that intragroup capital and liquidity transfers will be limited by home/host regulatory differences and actions into stress tests.\n- Focuses on embedding the banking groups’ geographical structure into stress-testing exercises rather than relying solely on consolidated numbers.\n- Uses illustrative calculations to quantify the potential adjustments needed when intragroup flows are restricted." }, { "heading": "Illustrative calculations and empirical exercise", "content": "- Provides illustrative calculations on the size of the potential adjustments needed in the presence of some limits on intragroup flows for banks included in the June 2011 EBA stress tests.\n- The empirical exercise is based on banks included in the June 2011 EBA stress tests (as specified in the source)." }, { "heading": "Findings and implications", "content": "- Stress tests that assume unrestricted internal transferability of capital and liquidity can understate vulnerabilities created by cross-border regulatory fragmentation and potential ring-fencing.\n- Integrating constraints on intragroup flows can materially affect stress-test outcomes and the assessment of bank resilience in cross-border banking groups.\n- The approach highlights the importance of considering host-country regulatory constraints and potential actions by home or host regulators during stress episodes." }, { "heading": "Policy recommendations and prudential implications", "content": "- Stress-testing frameworks should \"un-consolidate\" aspects of consolidated tests by explicitly modeling limits on intragroup capital and liquidity flows arising from differing national regulations and potential regulator actions.\n- Regulators and supervisors should incorporate geographic fragmentation and ring-fencing risks into stress-test designs to better capture systemic and idiosyncratic vulnerabilities of cross-border banking groups.\n- Greater attention is warranted to host country regulator constraints and to how minimum capital requirements and other regulatory differences across countries can interact with stress scenarios.\n\n---\n\n Content in this bundle\n\n- Wp12288\n - Wp12288 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Wp12288 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151" } ], "bullets": [ "[Markdown version](/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151/index.md)", "[Structured JSON version](/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151/index.json)", "[Bundle manifest](/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151/bundle-manifest.json)", "Authors: Eugenio M Cerutti, Christian Schmieder", "Published: December 6, 2012", "Series: IMF Working Papers", "DOI: https://doi.org/10.5089/9781475519051.001", "The recent crisis has spurred the use of stress tests as a (crisis) management and early warning tool.", "A key weakness of current consolidated stress tests is the assumption that capital and liquidity are available wherever they are needed within the banking group.", "That assumption neglects:", "The study presents a framework to integrate limits on intragroup flows into stress tests and provides illustrative calculations for banks included in the June 2011 EBA stress tests.", "Presents a framework on how to integrate the risk that intragroup capital and liquidity transfers will be limited by home/host regulatory differences and actions into stress tests.", "Focuses on embedding the banking groups’ geographical structure into stress-testing exercises rather than relying solely on consolidated numbers.", "Uses illustrative calculations to quantify the potential adjustments needed when intragroup flows are restricted.", "Provides illustrative calculations on the size of the potential adjustments needed in the presence of some limits on intragroup flows for banks included in the June 2011 EBA stress tests.", "The empirical exercise is based on banks included in the June 2011 EBA stress tests (as specified in the source).", "Stress tests that assume unrestricted internal transferability of capital and liquidity can understate vulnerabilities created by cross-border regulatory fragmentation and potential ring-fencing.", "Integrating constraints on intragroup flows can materially affect stress-test outcomes and the assessment of bank resilience in cross-border banking groups.", "The approach highlights the importance of considering host-country regulatory constraints and potential actions by home or host regulators during stress episodes.", "Stress-testing frameworks should \"un-consolidate\" aspects of consolidated tests by explicitly modeling limits on intragroup capital and liquidity flows arising from differing national regulations and potential regulator actions.", "Regulators and supervisors should incorporate geographic fragmentation and ring-fencing risks into stress-test designs to better capture systemic and idiosyncratic vulnerabilities of cross-border banking groups.", "Greater attention is warranted to host country regulator constraints and to how minimum capital requirements and other regulatory differences across countries can interact with stress scenarios.", "**Wp12288**" ], "related": [ { "title": "Wp12288", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12288.pdf", "summary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12288.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12288.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151/index.md", "json": "/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151/index.json", "bundleManifest": "/en/publications/wp/issues/2016/12/31/the-need-for-un-consolidating-consolidated-banks-stress-tests-40151/bundle-manifest.json" }, "generatedAtUtc": "2026-09-18T08:22:04.604Z" }