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

  • Eugenio Cerutti
  • Christian Schmieder

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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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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  1. Ralph De Haas & Iman Van Lelyveld, 2008. "Internal capital markets and lending by multinational bank subsidiaries," Working Papers 105, European Bank for Reconstruction and Development, Office of the Chief Economist.
  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. 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.
  4. Martin Cihák & Li L. Ong, 2010. "Of Runes and Sagas; Perspectiveson Liquidity Stress Testing Using An Iceland Example," IMF Working Papers 10/156, International Monetary Fund.
  5. Christian Schmieder & Tidiane Kinda & Nassim N. Taleb & Elena Loukoianova & Elie Canetti, 2012. "A New Heuristic Measure of Fragility and Tail Risks; Application to Stress Testing," IMF Working Papers 12/216, International Monetary Fund.
  6. Eugenio Cerutti & Anna Ilyina & Yulia Makarova & Christian Schmieder, 2010. "Bankers Without Borders? Implications of Ring-Fencing for European Cross-Border Banks," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  7. 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.
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