Speech

IMF-LSE Symposium on “Macroprudential Stress Tests and Policies: A Framework”

December 15, 2016

Distinguished guests, LSE and IMF colleagues, ladies and gentlemen.

I am very pleased to be here this morning to welcome you to this symposium.

I would like to thank the organizers—the Monetary and Capital Markets Department of the IMF and the Systemic Risk Centre of the London School of Economics. We have also partnered with several central banks and other financial authorities, along with respected academics who are with us today.

The subject of today's symposium is on macro prudential stress tests and policies. It marks the start of an exciting research agenda that will be undertaken by the Fund and LSE with the goal of advancing a global perspective on stress tests and policies.

To set up a stage of further discussion, let me first provide a point of reference to the the global financial crisis.

The unprecedented events of 2008 demonstrated the speed and magnitude at which contagion could spread through financial systems. The fall of Lehman Brothers showed how relatively small initial losses could be amplified to systemic proportions with severe consequences, especially for ordinary citizens and the collective good.

The practice worldwide in the past few years since the global financial crisis has told us that stress tests are an effective way to understand the dynamics of the crisis. But first we need a good framework for stress tests.

Well-designed stress tests can generate valuable information for policy makers in many ways. Here, let me highlight three.

▪ First, stress tests offer a quantitative, forward-looking assessment of the resilience of the financial system.

In particular, they can detect potential contagion effects across institutions and markets.

▪ Second, stress tests can identify macrofinancial vulnerabilities.

▪ And third, stress tests can also generate useful information for risk management and decision-making in times of financial stress.

An important aspect of good frameworks for stress test concerns about how to integrate stress testing in the design of macroprudential tools?

As a matter of fact, there has been significant effort in the integration of stress testing in the design of macroprudential tools since the crisis. Here, I would like to focus on three areas that require specific attention.

The first area is about analytics. This includes:

▪ The improvement of databases and secure access to them;

▪ The continued focus on modeling contagion losses, and stress-testing, across entities and markets in countries; and

▪ The need to emphasize a global framework that acknowledges the fact that countries are becoming more and more integrated.

The second area is about the evolution of policy tools. This means:

▪ Developing tools that are timely, and can handle systemic risk adequately; and

▪ instruments that are properly calibrated so that policy can be deployed effectively.

The third area is about governance and accountability. Emphasizing accountability is crucial to the credibility and robustness of stress-tests and macroprudential tools.

The IMF is strongly committed to making contributions to building better stress test frameworks, particularly in the integration of stress testing in the design of macroprudential tools.

I am sure that we can share with you lessons from our research and operational experiences from the field, through our Financial Sector Assessment Programs, technical assistance missions, and multilateral surveillance projects.

So I am extremely honored to have all of you here today to explore more on these issues, along with a possible roadmap for future work. With these objectives in mind, allow me to wish you all the best for very productive discussions over the next two days.

Thank you.