Measuring Systemic Banking Resilience : A Simple Reverse Stress Testing Approach
Reverse stress tests can be a useful tool to evaluate bank resilience to a credit shock, especially in environments where financial data are limited or opaque. This paper develops a simple and transparent country-level banking sector resilience ind...
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| Language: | English |
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World Bank, Washington, DC
2021
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| Online Access: | http://documents.worldbank.org/curated/undefined/696701638211617923/Measuring-Systemic-Banking-Resilience-A-Simple-Reverse-Stress-Testing-Approach http://hdl.handle.net/10986/36640 |
| Summary: | Reverse stress tests can be a useful
tool to evaluate bank resilience to a credit shock,
especially in environments where financial data are limited
or opaque. This paper develops a simple and transparent
country-level banking sector resilience indicator that
focuses on tail risks, the Consolidated Distance to
Breakpoint. Based on individual bank reverse stress test
results, this novel metric quantifies the increase in
nonperforming loans needed to deplete capital buffers for a
subset of the most fragile banks that collectively represent
at least 20 percent of total banking system assets, a level
commonly associated with a systemic banking crisis. The
paper calculates the Consolidated Distance to Breakpoint
using public data for more than 1,500 banks in 59 emerging
market and developing economies during the COVID-19
pandemic. The paper explores the value added of this metric
in relation to widely used country-level macro-financial and
soundness indicators. The results show that the association
of the Consolidated Distance to Breakpoint with these
macro-financial and financial soundness indicators is
limited. This suggests that this new indicator encapsulates
complementary information, possibly because aggregate
measures may obscure challenges in individual banks. As
such, the Consolidated Distance to Breakpoint metric could
serve as a useful input to establish a basic understanding
of a banking sector’s resilience. |
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