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Bank Stress Tests as an Information Device for Emerging Markets: The Case of Russia

The recent financial crisis emphasized the need for effective financial stability analyses and tools for detecting systemic risk. This paper looks at the assessment of banking sector resilience through stress testing. We argue such analyses are valuable even in emerging economies, which suffer from limited data availability, short time series, and structural breaks. We propose a top-down stress test methodology that employs relatively limited information to overcome this data problem. Moreover, as credit growth in emerging economies tends to be rather volatile, we rely on a dynamic approach projecting key balance sheet items. The application of our proposed stress test framework to the Russian banking sector reveals high sensitivity of the capital adequacy ratio to the economic cycle. This shows up in both of the two-year macroeconomic scenarios considered: a baseline and an adverse one. Both scenarios indicate a need to increase the capital of the Russian banking sector. Furthermore, given that Russia’s banking sector is small and fragmented by comparison with advanced economies, a loss of external financing could cause profound economic stress, especially for small and medium-sized enterprises. The Russian state has a low public debt-to-GDP ratio and plays a decisive role in the banking sector. These factors allow sufficient fiscal space for recapitalization of problematic banks under our proposed baseline and adverse scenarios.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 63 (2013)
Issue (Month): 1 (March)
Pages: 87-105

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Handle: RePEc:fau:fauart:v:63:y:2013:i:1:p:87-105
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  1. Mathias Drehmann & Steffen Sorensen & Marco Stringa, 2008. "The integrated impact of credit and interest rate risk on banks: an economic value and capital adequacy perspective," Bank of England working papers 339, Bank of England.
  2. World Bank & International Monetary Fund, 2005. "Financial Sector Assessment : A Handbook," World Bank Publications, The World Bank, number 7259.
  3. Petr Jakubik & Christian Schmieder, 2008. "Stress Testing Credit Risk: Is the Czech Republic Different from Germany?," Working Papers 2008/9, Czech National Bank, Research Department.
  4. Ian Levely, 2012. "Measuring Intermediate Outcomes of Liberia’s DDRR Program," Working Papers IES 2012/2, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2012.
  5. Virolainen , Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Research Discussion Papers 18/2004, Bank of Finland.
  6. Michael Boss & Martin Fenz & Johannes Pann & Claus Puhr & Martin Schneider & Eva Ubl, 2009. "Modeling Credit Risk through the Austrian Business Cycle: An Update of the OeNB Model," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 17, pages 85-101.
  7. Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
  8. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank, Research Centre.
  9. Michaela Posch & Stefan W. Schmitz & Beat Weber, 2009. "EU Bank Packages: Objectives and Potential Conflicts of Objectives," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 17, pages 63-84.
  10. Vernikov, Andrei, 2009. "Russian banking: The state makes a comeback?," BOFIT Discussion Papers 24/2009, Bank of Finland, Institute for Economies in Transition.
  11. Gabriel Jiménez & Jesús Saurina, 2006. "Credit Cycles, Credit Risk, and Prudential Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
  12. Petr JAKUBÍK, 2007. "Macroeconomic Environment and Credit Risk (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 60-78, March.
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