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Ring fencing and consolidated banks’ stress tests

  • Cerutti, Eugenio
  • Schmieder, Christian

The recent crisis has spurred the use of bank stress tests as a crisis management and early warning tool. However, a weakness is that current stress tests are based on consolidated balance sheets, and thus omit potential risks embedded in banking groups’ geographical structures by assuming that capital and liquidity are available wherever they are needed within the group. This study presents a framework to integrate ring fencing and regulatory differences (e.g., minimum capital requirements) into cross-border bank stress tests. Case studies show how some forms of ring fencing—home or host regulators limiting flows of capital and income within a group—could significantly increase banks’ capital needs.

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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 11 (2014)
Issue (Month): C ()
Pages: 1-12

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Handle: RePEc:eee:finsta:v:11:y:2014:i:c:p:1-12
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  1. Cetorelli, Nicola & Goldberg, Linda S., 2012. "Liquidity management of U.S. global banks: Internal capital markets in the great recession," Journal of International Economics, Elsevier, vol. 88(2), pages 299-311.
  2. International Monetary Fund, 2012. "Czech Republic; Technical Note on Stress Testing the Banking Sector," IMF Staff Country Reports 12/174, International Monetary Fund.
  3. repec:dgr:uvatin:20120111 is not listed on IDEAS
  4. de Haas, Ralph & van Lelyveld, Iman, 2010. "Internal capital markets and lending by multinational bank subsidiaries," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 1-25, January.
  5. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, vol. 67(5), pages 1811-1843, October.
  6. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2005. "How banks go abroad : branches or subsidiaries ?," Policy Research Working Paper Series 3753, The World Bank.
  7. Antonella Foglia, 2009. "Stress Testing Credit Risk: A Survey of Authorities' Aproaches," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 9-45, September.
  8. Avgouleas, Emilios & Goodhart, Charles & Schoenmaker, Dirk, 2013. "Bank Resolution Plans as a catalyst for global financial reform," Journal of Financial Stability, Elsevier, vol. 9(2), pages 210-218.
  9. Hardy, Daniel C. & Nieto, Maria J., 2011. "Cross-border coordination of prudential supervision and deposit guarantees," Journal of Financial Stability, Elsevier, vol. 7(3), pages 155-164, August.
  10. International Monetary Fund, 2012. "Spain; Financial System Stability Assessment," IMF Staff Country Reports 12/137, International Monetary Fund.
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