Supervisory Stress Testing Methodologies, Principles and ... · Chinese economy faces serious growth deceleration while Asian emerging economies still –An

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Supervisory Stress Testing – Methodologies,

Principles and Emerging Risk Identification

Promontory Japan an IBM company

CEO & Managing Director

Tsuyoshi Oyama

© Copyright 2019 Promontory Japan, an IBM Company. All rights reserved. 1CONFIDENTIAL© Copyright 2019 Promontory Japan, an IBM Company. All rights reserved.

1. Supervisory Stress Testing

– Purpose and methodology


What is Supervisory Stress Testing?

Definition

⚫ Supervisory stress testing is a supervisory tool that financially and economically

stresses banks’ portfolio or financial system and thereby ensures their resiliency

under crises

Brief history

⚫ Asian crisis → emerging risks → stress testing

⚫ IMF/World Bank → Macro stress testing

⚫ Basel II Pillar II/ICAAP/SREP

⚫ GFC → Supervisory Stress Testing

⚫ Crisis-times stress testing → Normal times stress testing


Supervisory Stress Testing – Purpose

⚫ Ensure the resiliency of individual banks or the financial system with the forward-looking

way

⚫ Identify the financial/economic weaknesses of individual banks or the financial system to

be addressed

⚫ Increase the financial buffer of individual banks or the financial system based on the

outcome of stress testing, which is much higher than the regulatory required level

⚫ Ensure the sound capital policy, which should be aligned with the outcome of forward-

looking stress testing

⚫ To mitigate financial imbalances or bubbles by using as a macro-prudential tool such as

a counter-cyclical buffer

⚫ To gain market confidence and thereby stabilize the financial system ( in time of crises)


Supervisory Stress Testing – Methodology

⚫ Making stress scenarios✓ Making the baseline scenario✓ Story making✓ Degree of stresses✓ Time horizon✓ Type of covered risks✓ Macroeconomic variables✓ Macroeconomic modeling✓ Contagion modeling✓ (Bank facing) Risk factor variables✓ (Bank facing) Risk factor modeling✓ Banks’ reaction in the scenarios/

Dynamic or static

⚫ The way of conducting stress test✓ Top-down vs. bottom up✓ Use of regulatory model or not

⚫ The way of using the outcome✓ Approve or not✓ Thresholds with penalty✓ Publish or not


Methodology – Baseline scenario

⚫ Making the baseline scenario✓ Own projection → policy biased?✓ Market consensus → neutral but the quality is not warranted and data is limited✓ Usually no harm to banks but sometimes not necessarily the case✓ Should the baseline scenario be the most likely scenario?

➢ It should be but it might not be in reality for some reasons➢ Baseline scenarios tend to be converged towards the world implied by potential

growth rates, which are often estimated with the backward-looking way and thus often dismiss structural breaks e.g. caused by demographic or innovation factors

Is it the most likely scenario?


Methodology – Stress scenario

⚫ Stress scenario story making✓ Need stories/narratives or not

➢ Intensified stress-first stress testing often leads to “no narratives” (e.g. reverse stress testing)➢ Scenario generator → often stochastic → and backward-looking like VaR➢ (Deterministic) story making is important because;

• It makes stress scenarios being realistic and thus persuasive• It clarifies how the event evolves (e.g. repercussion process)

✓ How to make stories➢ Crisis-first process → Identify “stress power sources” and then imagine the story where the

accumulated stress power is released (→ stress events usually follow the specific structure)• Business or credit cycles• Structural changes• Innovations• Politics/geopolitics• Climate?

➢ Weakness-first process → Identify “weakness of the financial system” and then imagine the story where this weakness is hit by specific stresses

How wet/dry should be the stress scenarios?


Methodology – Degree of stresses

⚫ Degree of stresses✓ Frequency

➢ Once every 20--30 years?➢ Size of deviation from the average (statistical/stochastic method)

✓ Size of specific damages(Subjects of damages)➢ GDP growth rate/output gap➢ Employment➢ Capital adequacy ratio/LCR of major banks

(Sizes)➢ Sizes corresponding to the specific frequency➢ History➢ Failure level (reverse stress testing)

How strong should the supervisors stress banks?


Methodology – Time horizon

⚫ Time horizon✓ One day – a few weeks

➢ Liquidity stress testing

✓ 1 year➢ One-off event shock➢ Often driven by abrupt market disruptions

✓ 2-3 years➢ The period for typical financial crises being abated➢ The limits for assuming passive reactions (static scenarios)

✓ 7-10 years➢ The period for structural issues (such as demographic, innovation) being

materialized➢ Assuming dynamic reactions (dynamic scenarios)

How far into the future should the supervisors be concerned with?


Methodology – Type of covered risks

⚫ Type of covered risks✓ Credit risk

➢ Basel II/III type, whole and retail credit➢ Name concentration or Industry/country concentration➢ Sovereign?

✓ Market risk➢ Interest rate, stock price, exchange rate, etc.

✓ IRRBB risk✓ Liquidity risk

➢ Funding liquidity risk➢ Market liquidity risk

✓ Operational risk➢ Basel II/III type➢ Misconduct, reputation

✓ NII/PPNR risk✓ Business model/Strategy risk✓ Climate risk?

What risks facing banks and the system should the supervisors cover in the stress testing?


Methodology – Macroeconomic variables

• Macroeconomic variables✓ Stress scenarios are expressed by the changes in macroeconomic variables✓ Major variables that affect banks facing risk factor variables (i.e. banks’

asset/liability and their business performances) and thus should quantitatively be show under the scenarios are the followings;➢ GDP growth rate/ regional GDP growth rate?➢ Unemployment rate➢ Inflation rate➢ Long-term and short-term interest rates➢ Exchange rate➢ Real estate price➢ Stock price➢ Credit spread

….

What indicators that reflect scenario developments should be selected?


Methodology – Macroeconomic/contagion modeling

⚫ Macroeconomic modeling✓ Purpose

➢ Macroeconomic projection including baseline scenarios➢ Focusing only on the stress impacts and their repercussions

✓ Model type➢ Equilibrium model

• DSGE• FAVAR• VAR

➢ Partial equilibrium model➢ Structural vs. Reduced form

✓ Publish or not

⚫ Contagion modeling✓ Type of contagions✓ Feed-back effects are included or not

What types of “small world” should be prepared for stress testing?


Methodology – (Banks facing) Risk factor variables

⚫ (Banks facing) Risk factor variables✓ Macroeconomic variables in the scenarios have to be translated into risk factor

variables that directly affect banks’ asset/liability and their business performances✓ Major risk factor variables that should be estimated are the following;

➢ PD, LGD, EAD for whole and retail loan portfolios (often by regions)➢ Long-term and short-term interest rates, and the shape of yield curve➢ Stock price➢ Real estate price➢ Credit spread➢ Market volatility➢ Operational and conduct risk factors➢ Sovereign rating➢ Green factors?➢ NII/PPNR

✓ Meanwhile, the market price-based stress testing uses only stock prices of banks to capture damanges

What indicators directly represent the risks facing banks and the system and thus should be

connected with macroeconomic variables?


Methodology – (Banks facing) Risk factor modeling

⚫ Risk factor modeling✓ How to model the risk factors by using macroeconomic variables;(For example)

➢ GDP growth rate → PD for wholesale loan portfolio, some PPNR items➢ Unemployment rate → PD for retail loan portfolio➢ Inflation rate →Market risk and IRRBB➢ Long-term and short-term interest rates →Market risk, IRRBB and NII➢ Exchange rate → PD for wholesale loan portfolio, some PPNR items➢ Real estate price → LGD for wholesale loan portfolio, PD, some PPNR items➢ Stock Price → Equity risk, some PPNR items➢ Credit spread → Some PPNR items

✓ A difficulty in making a risk factor model is the way to distinguish idiosyncratic factors from systematic factors➢ PPNR and other risk factors are often strongly affected by bank-specific factors

including its business strategy➢ If industry-wide risk factor data is available, this should be used to distinguish

idiosyncratic from systematic factors and remove the former from the model

How should the risk factor variables be connected with macroeconomic variables?


Methodology – Banks’ reactions to the events in the scenarios

⚫ Banks’ reactions in the scenarios/dynamic or static✓ Supervisory stress testing often does not allow banks to reflect their possible

reactions to the stress events (changes in B/S) partly because management reactions often ease the negative impacts with their discretionary way

✓ Meanwhile, no reactions sometimes lead to unrealistic outcome, which is hard for banks to accept

✓ Whether the supervisors allow banks to reflect their possible reactions to the stress events depends on the purpose of stress testing➢ If the supervisors would like to examine their reactions (e.g. RRP) to stress

events, the supervisors might allow banks to reflect their reactions in the scenarios

➢ If the supervisors would like to request banks to set aside more capital, the supervisors might not allow banks to reflect their reactions in the scenarios

How should the supervisors consider possible banks’ reactions to the events ?


Methodology – The way of conducting stress test

⚫ The way of conducting stress test✓ There are two approaches for conducting supervisory stress test, namely top down

and bottom up approaches.✓ Top down approach

➢ It is the supervisors who make scenario and conduct stress test using their own model with data which is often collected from banks for this purpose

✓ Bottom up approach ➢ It is the supervisors who make scenario but it is basically banks who conduct

stress test using their own model and own data. In some cases, however, banks are required to use the model provided by the supervisors. The supervisors often ensures appropriateness of the process of banks’ conducting stress test and collect the outcome from banks for the supervisory purpose

How should the supervisors balance efficiency and accuracy in stress testing? -- Top down

vs. bottom up approaches


Methodology – The way of using the outcome

⚫ The way of using the outcome✓ Some supervisors set the thresholds for some outcome indicators (e.g. CAR under

stress) and request banks whose indicators fall below the thresholds to address this by setting aside more capital, restricting dividend payments, etc.

✓ Some supervisors also examine the process of banks’ conducting stress test and request banks to address any weaknesses of internal controls over stress testing if they had

✓ Some supervisors do not penalize banks whose outcome do not reach the threshold but publish the main outcome of individual banks and thereby expose banks to the peering pressures

✓ Some supervisors use the outcome only for deepening their supervisory dialogue with banks

How should the supervisors use the outcome of stress testing? For penalty or dialogue?


2. Supervisory Stress Testing

– Major countries’ cases


Supervisory Stress Testing in Major Countries 1/2

US UK Europe

Responsible

agency

FRB BOE EBA/ECB

Name CCAR/DFAST Stress Test EU-wide stress testing exercise

Starting year Since 2011 (since 2009 if including

SCAP)

Since 2014 Since 2011

Frequency Annual Annual except the exploratory

scenario that is bi-annual

Bi-annual

Financial

institutions required

to participate

BHC with consolidate assets of more

than USD 100 billion and 35 IHCs of

foreign banking group

7 banks with retail deposits of

more than 50 billion pounds

48 banks with consolidated

assets of more than 30 billion

Euro

Number and type

of scenarios

3 (2 since 2019), Baseline, adverse

(discontinue since 2019) and severely

adverse scenarios

3, Baseline, cyclical and

exploratory scenarios

2, Baseline and adverse

scenarios

Stress events

assumed by

scenarios

Severely adverse assumes another

global financial crisis meanwhile

adverse assumes a little milder stress

that are triggered by the risks not

focused in severely adverse

Cyclical assumes another global

financial crisis meanwhile

exploratory focused on mid/long-

term business model risk

Adverse assumes another

global financial crisis

Degree of stresses Average CET1 ratio declined by 4.4pp

in the case of severely adverse

Average CET1 ratio declined by

5.2pp in the case of cyclical

Average CET1 ratio declined by

3.8pp


Supervisory Stress Testing in Major Countries 2/2

US UK Europe

Variability of

assumed B/S

Dynamic Dynamic Static

Any hurdle rates? Yes, CET1 ratio has to be more than

4.5%

Yes, minimum levels over CET1

ratio, CAR（Pillar I＋Pillar IIA)＋capital buffer have to be cleard

No

Penalty in the case

of noncompliance

with hurdle rates

Limits on dividend payments, etc. Revision of capital policy planning NA

Relation with CAR Integrated into capital conservation

buffer since 2019

Integrated into Pillar IIB Stress test outcome will be used

for SREP

Others Qualitative assessment discontinues

since 2019

Time horizon of exploratory

scenarios is longer than others by

2 years (7 years)

Assumed degree of stresses

vary among nations


Comparison of degree of stresses among major stress tests

Source: European Court

of Auditors “EU-wide

stress test for banks”

2019





2019






2019


Source: European Court of Auditors “EU-wide stress test for banks” 2019


3. BCBS Stress Testing Principles


Stress Testing Principles (BCBS, “Stress testing principles” Oct. 2018)

1. Stress testing frameworks should have clearly articulated and formally adopted objectives✓ Stress testing frameworks should be designed to meet clear objectives that are

documented and approved at the board level of the organisation, or an appropriately senior-level governance body. The objectives should be the basis for setting out the framework’s requirements and expectations, and should be consistent with the bank’s or supervisory authority’s risk management framework and its overall governance structure.

✓ Staff involved in the implementation of stress testing frameworks should also have a clear understanding of the framework’s objectives, as this will help to guide any discretionary or judgmental elements.

✓ For authorities, relevant high-level objectives may relate to, for example: (i) assessing the adequacy of levels of capital or liquidity of supervised banks; (ii) fostering banks’ own stress testing and risk management capabilities; (iii) supporting other supervisory activities (eg on-site inspections, further in-depth analysis); (iv) providing a quantitative assessment of banks’ risk profiles, both for individual banks and for the banking system in aggregate; or (v) contributing to market confidence or strengthening market discipline. Authorities should communicate the intended objectives/use of stress testing results to participating banks in advance of the exercise.

Footnote: Please be noted that the authors revise the original principles by deleting some parts or highlight by bold letters or underwriting.



2. Stress testing frameworks should include an effective governance structure✓ Stress testing frameworks should include an effective governance structure that is clear,

comprehensive and documented. ✓ Roles and responsibilities should be specified for all aspects of the stress testing framework,

including scenario development and approval, model development and validation, reporting and challenge of results and the use of stress test outputs. The roles of the second and third lines of defence should be specified.

✓ Authorities should ensure that a comprehensive governance structure for all aspects of their stress testing framework is formulated by key stakeholders. The process should document a delineation of the roles for all relevant participants in the stress testing framework, inter-department (agency) coordination, and the nature and frequency of the communication of the results.

✓ Stress testing often involves multiple units within the authority; the governance structure should guide alignment between macroprudential and microprudential functions (egsuch alignment could be in terms of scenario development, data-sharing, data validation and the use of outputs from all stress testing exercises).



3. Stress testing should be used as a risk management tool and to inform business decisions✓ As a forward-looking risk management tool, stress testing constitutes a key input into

banks’ and authorities’ activities related to risk identification, monitoring and assessment. As such, stress testing should also contribute to formulating and pursuing strategic and policy objectives.

✓ When using the results of stress tests, banks and authorities should have a clear understanding of their key assumptions and limitations, for instance in terms of scenario relevance, risk coverage and model risk.

✓ The appropriate frequency will depend on several factors, including the objectives of the stress testing framework, the scope of the stress test, the size and complexity of the bank or banking sector, as well as changes in the macroeconomic environment.

✓ Authorities should make sure that stress tests are critically evaluated and properly integrated in their supervisory and/or financial stability programmes to be used along with other available analytical and/or policy instruments.

Continued …



3. Stress testing should be used as a risk management tool and to inform business decisions✓ Authorities may use stress testing results as one of the inputs for the supervisory process.

For instance, quantitative and qualitative outcomes of stress tests should help to identify risks and vulnerabilities to which banks may be exposed, assess banks’ capital and liquidity adequacy, as well as, where appropriate, inform reviews of banks’ internal governance and risk management arrangements. Stress tests are generally designed to quantify and inform the understanding of risks and as a result may or may not, depending on the objectives, involve hurdle rates/thresholds. When authorities use stress tests to assess banks’ capital and liquidity adequacy (eg through Pillar 2), they should also consider the appropriate supervisory responses to any deficiencies that are identified, which may include expectations for additional capital, risk reduction, or enhanced risk management, depending on the authority’s supervisory approach.

✓ Authorities may also use, where appropriate and relevant, stress testing outcomes for macroprudential purposes.

✓ Where management actions are part of the banks’ supervisory stress testing submissions, authorities should consider whether the proposed actions are part of, or consistent with,

the banks’ other strategic plans (such as recovery plans).



4. Stress testing frameworks should capture material and relevant risks and apply stresses

that are sufficiently severe✓ Stress testing frameworks should capture material and relevant risks, as determined by a

sound risk identification process. The risk identification process should include a comprehensive assessment of risks, which may include those deriving from both on- and off-balance sheet exposures, earnings vulnerabilities, operational risks, and other factors that could affect the solvency or liquidity position of the bank (or banks in the case of supervisory stress tests).

✓ Stress test scenarios should be designed to capture material and relevant risks identified in the risk identification process and key variables within each scenario should be internally consistent. A narrative should articulate how the scenario captures the risks. The scenarios should be sufficiently severe but plausible.

✓ The scenarios and sensitivities used in stress tests should be reviewed periodically to ensure that they remain relevant. Consideration should be given to historical events and hypothetical future events that take into account new information and emerging risks in the present and foreseeable future. The scenarios and the sensitivities should also take into account the current macroeconomic and financial environment.

Continued …



4. Stress testing frameworks should capture material and relevant risks and apply stresses

that are sufficiently severe ✓ When developing stress test scenarios, authorities should take into account identified

specific features or vulnerabilities of individual banks (eg their risk profiles and business models) and/or the banking sector as a whole. To the extent possible, they should also take into account emerging risks if these are relevant to the objective of the stress test. Authorities may also consider developments in banks’ internal scenarios and sensitivity analyses.

✓ Given the objectives of a particular exercise, authorities should evaluate whether common scenarios could be applicable to the whole banking sector or whether tailored scenarios for specific parts of the banking sector would be more appropriate.



5. Resources and organisational structures should be adequate to meet the objectives of the

stress testing framework ✓ Stress testing frameworks should have organisational structures that are adequate to meet

their objectives. Governance processes should ensure the adequacy of resourcing for stress testing, including ensuring that the resources have the appropriate skill sets to execute the framework.

✓ Processes to ensure resources have the appropriate skill sets could include building the skills of internal staff, ensuring knowledge transfer to internal staff, as well as hiring personnel with specialised stress testing skills.

✓ Both bank-run and supervisor-run (eg top-down) supervisory stress tests can be resource-intensive, requiring specialised staff, systems and IT infrastructure. Authorities should ensure that resources and the organisational structure are adequate given the complexity of the exercises. For example, authorities should consider the resources needed to interact with the banks that participate in the exercises, eg processes and infrastructure to address clarifying questions from banks, interacting with banks to check data quality/discrepancies, and providing feedback to banks on the results of the exercise



6. Stress tests should be supported by accurate and sufficiently granular data and by robust

IT systems✓ In order for risks to be identified and the results of stress tests to be reliable, the data used

should be accurate and complete, and available at a sufficiently granular level and in a timely manner. The granularity of the data should align with the objectives of the stress test (see also principle 7).

✓ Both banks and authorities should have in place a robust data infrastructure capable of retrieving, processing, and reporting information used in stress tests to ensure that the information is of adequate quality to meet the objectives of the stress testing framework. Processes should be in place to address any identified material information deficiencies.

✓ Authorities should leverage, to the extent possible, data already provided by banks to authorities, such as through banks’ regular supervisory reporting. Authorities should ensure consistency of data sources to the extent possible when aggregating data within supervisory stress tests, or across multiple stress tests.

✓ Authorities should review and foster improvement of banks’ data quality and risk data aggregation capabilities as part of their on-going supervision



7. Models and methodologies to assess the impacts of scenarios and sensitivities should be

fit for purpose✓ The models and methodologies used to derive stress estimates and impacts should fit the

purpose and intended use of the stress tests. ✓ Sound model development requires the collaboration of different experts. The model

developers should engage with stakeholders to gain insights into the risks being modelled and to identify the business objectives, business drivers, risk factors and other associated business information. The modelling choices and calibration decisions should consider the interactions between different risk types, as well as the linkages among models.

✓ Stress tests employ a certain amount of expert judgment, including assumptions within a model or methodology. In some cases model overlays are appropriate.

✓ Authorities that use stress testing to achieve microprudential objectives should review and challenge banks’ model outputs, for example, via review of backtesting results or peer benchmarking. As part of that evaluation process, authorities may develop their own models for benchmarking or challenge purposes.

✓ Where authorities have macroprudential objectives, their models may incorporate cross-bank features such as system-wide feedback or contagion.



8. Stress testing models, results and frameworks should be subject to challenge and regular

review✓ Regular review and challenge are key steps in the stress testing process for both banks and

authorities. ✓ When authorities use the results of a stress test for purposes within their remit, there

should be a challenge process to gain comfort in the assumptions driving the outcomes and the results themselves, and to duly consider model limitations and risk.

✓ Authorities should regularly review banks’ internal stress testing frameworks. Supervisors should examine the stress testing results as part of their review of the internal capital adequacy assessment process (ICAAP) and the liquidity risk management of banks. In particular, supervisors should consider whether the frameworks appropriately capture all material risks areas, and consider the results of forward-looking stress testing exercises as part of assessing the adequacy of the bank’s capital and liquidity.

✓ Authorities should also review other aspects of banks’ stress tests, such as whether they conform to their stated objectives and the governance arrangements. Supervisors should require management to address any material deficiencies that are identified in the stress testing framework, including cases where the results of stress tests are not adequately taken into consideration in the bank’s decision-making process.



9. Stress testing practices and findings should be communicated within and across

jurisdictions ✓ Communication of stress testing activities across relevant internal and external

stakeholders can have benefits for both banks and supervisors. Sharing of results can, where appropriate, provide important perspectives on risks that would not otherwise be available to an individual bank or authority.

✓ Disclosure of results of stress tests, whether by banks or authorities, can help to improve market discipline and provide confidence in the resilience of the banking sector to identified stresses.

✓ Where appropriate, authorities should foster transparency in stress testing processes and results and establish processes to communicate and coordinate stress testing activities with other domestic authorities, such as supervisory authorities, the central bank, resolution authorities and, where relevant, market conduct regulators.

✓ Communication across jurisdictions includes both the sharing of stress test results among home and host supervisors of internationally active banks, subject to applicable legal constraints, as well as the international coordination and collaboration of stress testing activities across jurisdictions where this is likely to yield useful synergies.


4. Practices of identifying emerging risks to be

considered in stress scenarios


The US-led trade friction, possible US recession, and signs of Chinese economy

growth deceleration are currently shaking the world economy and markets

The current systemic risk snapshot

◼ The US-led trade friction is now becoming the epicenter of various global systemic risks. In addition to the tariffs

already levied on Chinese products (USD 370 billion), the US menaced China to add another 160 billion, and also

pressured other countries to increase imports of agricultural products or produce automobiles in the US. The US will

also has a presidential election in 2020, which might cause unexpected negative shocks to global economy.

◼ There is not yet widespread concern that the trade friction will immediately disrupt strong US economy. However even

amid robust corporate earnings and low long-term interest rates in the US markets, many are now becoming nervous

about the sustainability of the US consumption as the recovery period has already reached the longest in the history.

◼ Meanwhile, the FRB stops raising its policy rates and likely keep this policy during next year. This will surely help the

economy keep the current momentum but also help increase financial imbalances, which might be burst abruptly.

◼ As the Chinese economy shows more signs of a slowdown, RMB might fall again against the USD, which has begun

to affect the currencies of emerging economies. Even though the macro economy in emerging nations is still strong,

worries over trade friction with the US and a low RMB depressing their own currencies have started to increase.


Many stress events that occurred in the past followed the specific pattern as indicated below;

◼ “Imbalances” represent unsustainable macroeconomic, financial and sometime political/geopolitical

situations to be addressed often by abrupt swing-back movements (e.g. a burst of financial bubble)

◼ “Triger events” represent the events that trigger the bouncing-back movements to address

unsustainable imbalance

◼ “Stress events” represent significant disruptions in macroeconomy, market, asset prices and

political/geopolitical situation, which are accompanied by the process of addressing imbalances

◼ “Ramification of stresses” represents the phenomena where one stress event causes chain

reaction of other stress events

✓ If comparing this to the case of “earthquake”

• “Imbalances” correspond to “size of crustal distortion”

• “Triger events” correspond to “tital power” or “injection of sea-water into magma”

• “Stress events” correspond to “earthquake”

• “Ramification of events” correspond to “induced other earthquakes”

Stress scenario story makingThe story should follow the specific structure

Stress

eventsImbalances

Trigger

events

Ramification

of stresses


Stress scenario : Slowdown in China

Stress ScenarioTrigger EventImbalance

Increasing NPL for banks

and NPA for industries

Asset Bubble

Increasing fiscal deficit of

local governments

Global asset market collapse

/Worsening relation with US

and others

Failure of regional banks,

local gov. incapability of

bailing out banks

Spread of Risk

Sharp Growth Deceleration

Macroeconomic Downturn・Stock Price Decline

↓ Export to/Spending

Tourists from CHN,

↓ Real Estate, Widespread

Global Risk-off

Asia Emerging Econ.

Slump

China

Overseas

Failure of agreement with the

US in trade talks

Real estate & stock price

collapse

Sharp RMB depreciation

Financial crisis

Investment decline

due to capital stock

adjustment

Increasing unemployment

Failure to control asset

price, capital outflow

JPN Econ. Major

Downward Pressure

Stronger polices to correct

fiscal imbalances

Stress scenario

story making –

An example


Asset bubble

《Japan》 Abenomics failurescenario◼ Trade friction/weak foreign econ◼ Staggering structural policies◼ Instability of Abe government

《China》 Growth deceleration scenario◼ Trade friction◼ Austerity policy and default increase◼ Uncertainly over the currency policy

《Europe》 EU destabilization and anothersovereign crisis scenario◼ Deepening divide in the EU over immigration policies◼ Trade friction◼ Policy stalemate of Italian government◼ Hard Brexit

《US》 Stock market rally reversal scenario◼ Trade friction◼ Price rise and int. rate hike

《Emerging econ》 Growth deceleration scenario

◼ Chinese econ. Decelation, Reminbi depreciation

◼ US interest hike, trade friction◼ Oil price hike, geopolitical tension rise

Trigger Imbalance

Asset

Bubble

NPL/banking syteminstability

Current A/C

imbalance

Structural policy failure

Social

frustration

NPL/ Increasing

unworkable capital stock

Current A/C

imbalance

Social

frustration

Social

frustration

Social

frustration

Fiscal

imbalance

Current

A/C

imbalance

Asset

bubble/

price risk

Fiscal

Imbalance

Structural

policy

failure

Geopoliti

cal

tension

rise

Geopolitical

tension rise

Stress scenario

story making –

An example


Selection of stress scenarios using emerging risk information

Global/Macro-

economicinbalances

Country specific factors

Industry/firm

specific factors

Funding liquidity

risk materia-

lized

Market liquidity

falls sharply

US politics

US economy

CH economy

US/CH relation

EU economy

Emerging economies

Stress scenarios and trigger events

EWA indicating risk materialization in

3-5 year


3-5 year


1-3 months

米国政治不安

米国景気後退

Ex. Selecting three scenarios

using risk heatmap information

4141

Only US economy is still

robust while other advanced

economies become slugish

Chinese economy faces

serious growth

deceleration while Asian

emerging economies still

keep some momentum

Increasing uncertainty over policy implementation of the

Trump administration, rising trade war fears

Series of misconduct events and cyber

security attacks

Rising military tensions in

the Middle East

Rising populism in Latin

America

Continued bubble?

and low int. rates

Emerging risk

monitoring – An

example

42

Speaker Tsuyoshi OyamaPromontory Financial Japan, an IBM company

CEO & Managing director

Tsuyoshi joined Promontory in 2019 after working 23 years at the

Bank of Japan as deputy director-general most recently and 10

years as a consultant providing forward-looking risk management

advisory services. At the BOJ, he led several macro-economic

research works up to 2001, and then moved to the bank

examination department as the first BoJ economist who analyses

Japanese macro-prudential issues. He had also led Basel II

implementation in Japan, and worked as a member of several

meetings of the Basel Committee. He was seconded to the Policy

Development and Review Department of the International Monetary

Fund during 1993-1997.

Publication;

“Post-crisis Risk Management” (John Wiley & Sons, 2010)

“Basel III Impact” (Toyo-Keizai, 2011)

“Banks at Risk” (John Wiley & Sons, co-authored, 2011)

“Post-crisis stress testing” (Kinyuzaiseijijo, co-authored, 2012)

“Building Risk Appetite Framework” (Chuo-Keizai, 2015)

“Global Financial Regulation -- 9 Categories and their Trends” (Chuo-Keizai, co-

authored, 2017)

Documents

Supervisory Stress Testing Methodologies, Principles and ... · Chinese economy faces serious growth deceleration while Asian emerging economies still –An