A Climate Stress-Test of the Financial System

“Bottom-up” methods are increasingly used to assess the vulnerability of water systems to climate change. Central to these methods is the climate “stress test”, where the system is subjected to various climatic changes to test for unacceptable outcomes. We present a framework for climate stress testing on a monthly timestep, suitable for systems whose dominant dynamic is seasonal or longer (eg. water resource systems with carry-over storage). The framework integrates multi-site stochastic climate generation with perturbation methods and in-built rainfall runoff modelling. The stochastic generation includes a low frequency component suitable for representing multi-annual fluctuations. Multiple perturbation options are provided, ranging from simple delta change through to altered seasonality and low frequency dynamics. The framework runs rapidly, supporting comprehensive multi-dimensional stress testing without recourse to supercomputing facilities. We demonstrate the framework on a large water resource system in southern Australia. The Matlab/Octave framework is freely available for download from https://doi.org/10.5281/zenodo.5617008.

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Review Paper on Composite Leading Index Creation for Forecasting the Bangladeshi Financial Sector

International Journal of Finance & Banking Studies (2147-4486) ◽

10.20525/ijfbs.v9i4.791 ◽

2020 ◽

Vol 9 (4) ◽

pp. 23-32

Author(s):

Maria Afreen

Keyword(s):

Financial Market ◽

Asset Management ◽

Systemic Risk ◽

Stress Test ◽

Financial System ◽

Financial Sector ◽

Hazard Model ◽

Capital Adequacy ◽

Policy Makers ◽

The Impact

In perspective of the economic vulnerability faced by banks in financial sector, this study mirrors the methodology used by Shumway (2001) – the dynamic hazard model that is able to forecast systemic risk in financial market arena. Here, the terminology followed is based on the CAMELS framework variables: capital adequacy, asset, management, earnings, liquidity and sensitivity to market risk. The objective of this study is to construct a macroprudential indicator (MPI) for the case of Bangladeshi financial market. The result will then be tested for robustness with macro-stress test. Lagged independent variables will be used in the simple hazard model to allow early prediction of MPI in the year in which the crisis happens. The empirical findings can be used as a guideline for the Bangladesh Government and policy makers in accessing, examining and forecasting the health of the Bangladeshi financial system and formulate suitable financial system policies for control. MPI generates information about systemic risk allowing the detection of potential economic crises functioning as an early warning indicator. Government and policy makers will be able to make early preparation in cushioning any potential crises by means of the MPI. Thus the impact of the crises could be minimized and eventually reduce its impact on the Bangladesh economy. The specific objectives are to assemble a novel MPI that is able to recommend early signals of financial market vulnerability, to identify the MPI turning points and establish a comprehensive reference chronology for Bangladeshi financial market and to evaluate the predictive performance of newly constructed MPI on characterizing Bangladeshi financial sector.

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Evaluación de la solvencia bancaria: Un modelo basado en las pruebas de resistencia de la banca española

Studies of Applied Economics ◽

10.25115/eea.v32i2.3225 ◽

2020 ◽

Vol 32 (2) ◽

pp. 593

Author(s):

Julio Abad González ◽

Cristina Gutiérrez López

Keyword(s):

Multiple Regression ◽

Stress Test ◽

Financial System ◽

Test Results ◽

Predictive Capability ◽

Tier 1 ◽

Credit Institutions ◽

Tier 1 Capital

Spanish financial system is involved in a restructuring and refinancing process and, in 2012, credit institutions have been submitted to a stress test in order to check their solvency and resilience against increasingly worse economic conditions.This study aims to predict those stress test results measured in terms of tier 1 capital by means of multiple regression where indicators are obtained from the financial statements.The results show that autonomy ratio (equity /debt) has a strong predictive capability, although the model should also consider the outlier status of the nationalized banks.

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Malta

IMF Staff Country Reports ◽

10.5089/9781513520971.002 ◽

2019 ◽

Vol 19 (350) ◽

Author(s):

Keyword(s):

Euro Area ◽

Stress Testing ◽

Business Models ◽

Banking Sector ◽

Stress Test ◽

Financial System ◽

Stress Tests ◽

European Banking Authority ◽

European Banking ◽

Shed Light

The Malta FSAP stress testing exercise took place immediately following the IMF’s 2018 Euro Area FSAP and concurrently with the 2018 stress test of the European Banking Authority (EBA). A comprehensive set of stress tests and interconnectedness analyses were conducted to assess the resilience of Malta’s financial system and shed light on potential vulnerabilities, complementing the euro area FSAP and EBA exercises by tailoring the scope and depth to the Maltese financial system. The solvency stress test covered 11 banks representing 93 percent of the banking sector assets (excluding foreign branches) and diverse business models.

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Luxembourg

IMF Staff Country Reports ◽

10.5089/9781484316832.002 ◽

2017 ◽

Vol 17 (261) ◽

Author(s):

Keyword(s):

Stress Test ◽

Housing Prices ◽

Financial System ◽

Technical Note ◽

Financial Capital ◽

Test Results ◽

Cross Border ◽

Financial Soundness ◽

Contagion Risk ◽

The Stability

This Technical Note reviews the stability of Luxembourg’s financial system. The financial soundness indicators for Luxembourg’s financial system, which plays a key role in the intermediation of financial capital, have remained relatively robust in recent years. Household stress test results suggest that households’ solvency would be significantly affected by a drop in income and housing prices and a rise in unemployment. Bank liquidity displays broad resilience, but would be weakened should wholesale funding dry up or funding stress emerge in foreign currencies. Banks were found to be less vulnerable to direct contagion risk through bilateral exposure; however, most banks have considerable cross-border exposure.

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Climate Change and the Financial System

Annual Review of Resource Economics ◽

10.1146/annurev-resource-110119-031134 ◽

2020 ◽

Vol 12 (1) ◽

pp. 299-320 ◽

Cited By ~ 3

Author(s):

Irene Monasterolo

Keyword(s):

Value At Risk ◽

Financial Stability ◽

Financial Risk ◽

Global Climate ◽

Stress Test ◽

Financial System ◽

Financial Risks ◽

Low Carbon ◽

Deep Uncertainty ◽

Climate Risks

The financial system could help achieve the global climate targets by aligning investments to sustainability. However, investors are largely exposed to carbon-intensive assets that could become stranded, thus delaying the low-carbon transition and bringing new sources of risk for financial stability, i.e., climate-related financial risks. Here, we discuss climate-related financial risks, the challenges they pose to traditional economic and financial risk assessment, and the implications for the implementation and feasibility of climate policies. We then present science-based approaches that introduce forward-looking climate risks and their deep uncertainty in financial risk management (e.g., via the climate value at risk, climate spread, climate stress-test). Finally, we present results of applications aimed at pricing climate risks in investors’ portfolios and calculating the largest losses that could lead to systemic risk, in collaboration with leading financial institutions.

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