Identifying banks with significant negative effects on financial stability in systemic shock scenarios

We present a method that allows us to assess the effects on financial stability caused by banks exiting the market in a system-wide stress event based on a consistent and conclusive systemic stress scenario. The method fills a gap in the OeNB’s toolkit for assessing the financial stability effects of idiosyncratic and systemic bank failures (a method for an idiosyncratic scenario was developed in 2019). The outlined method follows a multistep approach. It is based on the idea that banks that are vulnerable and exposed to a shock get into trouble simultaneously and might even need to exit the market at the same time. In the first step, we define economic and financial shock scenarios. In the second step, we identify banks that are highly exposed to these shocks and are likely to default. The third step considers any potential mitigating (or amplifying) effects on banks’ solvency stemming from their membership in an institutional protection scheme (IPS). In the fourth and last step, we identify those banks whose exit causes marginal negative effects on the financial system in the system-wide event. Knowledge about the consequences of banks’ simultaneous failure for the financial system provides fundamental input for financial stability analysis, which, in turn, feeds into macroprudential supervision, crisis prevention, crisis management as well as deposit guarantee schemes. For this reason, Austria pursues an integrated approach in order to ensure overall consistency.