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

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Author Info

  • Eugenio Cerutti
  • Christian Schmieder

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/288.

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Length: 21
Date of creation: 06 Dec 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/288

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Related research

Keywords: Stress testing; International banks; Banking sector; capital adequacy; bank data; banking system; excess liquidity; bank subsidiaries; bank size; bank regulators; capital needs; banking supervision; banking stability; bank capital; bank solvency; tier 1 capital; banking authority; capital ratio; bank groups; capital market; capital markets; bank profit; bank structures; bank of international settlements; flows of capital; financial risk; bankers; subordinated debt; banking operations; bank losses; bank activities; capital adequacy ratios; banks � balance sheets; capital adjustment; bank balance sheet; bank operations; bank of greece;

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References

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  1. De Haas, Ralph & van Lelyveld, Iman, 2009. "Internal Capital Markets and Lending by Multinational Bank Subsidiaries," MPRA Paper 13164, University Library of Munich, Germany.
  2. Eugenio Cerutti & Stijn Claessens & Patrick McGuire, 2012. "Systemic Risks in Global Banking: What Available Data can tell us and What More Data are Needed?," NBER Working Papers 18531, National Bureau of Economic Research, Inc.
  3. Yulia Makarova & Anna Ilyina & Christian Schmieder & Eugenio Cerutti, 2010. "Bankers without Borders? Implications of Ring-Fencing for European Cross-Border Banks," IMF Working Papers 10/247, International Monetary Fund.
  4. Martin Cihák & Li L. Ong, 2010. "Of Runes and Sagas," IMF Working Papers 10/156, International Monetary Fund.
  5. Andreas A. Jobst & Li L. Ong & Christian Schmieder, 2013. "A Framework for Macroprudential Bank Solvency Stress Testing: Application to S-25 and Other G-20 Country FSAPs," IMF Working Papers 13/68, International Monetary Fund.
  6. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2007. "How banks go abroad: Branches or subsidiaries?," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1669-1692, June.
  7. Christian Schmieder & Tidiane Kinda & Nassim N. Taleb & Elena Loukoianova & Elie Canetti, 2012. "A New Heuristic Measure of Fragility and Tail Risks," IMF Working Papers 12/216, International Monetary Fund.
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Cited by:
  1. Andreas A. Jobst & Li L. Ong & Christian Schmieder, 2013. "A Framework for Macroprudential Bank Solvency Stress Testing: Application to S-25 and Other G-20 Country FSAPs," IMF Working Papers 13/68, International Monetary Fund.
  2. Eugenio Cerutti, 2013. "Banks’ Foreign Credit Exposures and Borrowers’ Rollover Risks Measurement, Evolution and Determinants," IMF Working Papers 13/9, International Monetary Fund.

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