The Need for "Un-consolidating" Consolidated Banks' Stress Tests

By Eugenio M Cerutti, Christian Schmieder

December 6, 2012

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Eugenio M Cerutti, and Christian Schmieder. The Need for "Un-consolidating" Consolidated Banks' Stress Tests, (USA: International Monetary Fund, 2012) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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 the group. This assumption neglects the fact that regulations differ across countries (e.g., minimum capital requirements), and, more importantly, that home/host regulators might limit flows of capital or liquidity within a group during periods of stress. This study presents a framework on how to integrate this risk element into stress tests, and 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.

Subject: Banking, Capital adequacy requirements, Countercyclical capital buffers, Cross-border banking, Financial institutions, Financial regulation and supervision, Financial sector policy and analysis, Financial services, Foreign banks, International banking, Stress testing

Keywords: Bank, Bank loss, Bank subsidiary, Banking, Banking group, Capital, Capital adequacy requirements, Capital buffer, Countercyclical capital buffers, Cross-border, Cross-border banking, Foreign banks, Global, Host country regulator, Liquidity, Parent bank, Regulator, Ring-fencing, Stability, Stress testing, Subsidiaries, Testing, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/288
Stock No:

WPIEA2012288
ISBN:

9781475519051
ISSN:

1018-5941

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