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Identifying banks with significant negative effects on financial stability in systemic shock scenarios

Author

Listed:
  • Judith Eidenberger

    (Oesterreichische Nationalbank (OeNB), Financial Markets Analysis and Surveillance Division)

  • Katharina Steiner

    (Oesterreichische Nationalbank, Foreign Research Division)

Abstract

We present a method that allows us to assess the effects on financial stability caused by banks exiting the market in a system-wide stress event based on a consistent and conclusive systemic stress scenario. The method fills a gap in the OeNB’s toolkit for assessing the financial stability effects of idiosyncratic and systemic bank failures (a method for an idiosyncratic scenario was developed in 2019). The outlined method follows a multistep approach. It is based on the idea that banks that are vulnerable and exposed to a shock get into trouble simultaneously and might even need to exit the market at the same time. In the first step, we define economic and financial shock scenarios. In the second step, we identify banks that are highly exposed to these shocks and are likely to default. The third step considers any potential mitigating (or amplifying) effects on banks’ solvency stemming from their membership in an institutional protection scheme (IPS). In the fourth and last step, we identify those banks whose exit causes marginal negative effects on the financial system in the system-wide event. Knowledge about the consequences of banks’ simultaneous failure for the financial system provides fundamental input for financial stability analysis, which, in turn, feeds into macroprudential supervision, crisis prevention, crisis management as well as deposit guarantee schemes. For this reason, Austria pursues an integrated approach in order to ensure overall consistency.

Suggested Citation

  • Judith Eidenberger & Katharina Steiner, 2021. "Identifying banks with significant negative effects on financial stability in systemic shock scenarios," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 42, pages 47-55.
  • Handle: RePEc:onb:oenbfs:y:2021:i:42:b:3
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    File URL: https://www.oenb.at/dam/jcr:bb5b74b0-c746-44f3-b9b8-9ada12eec29c/06_PB_FSR_42_Identifying_banks_with_significant_negative_effects_on_financial_stability_in_systemic_shock_scenarios.pdf
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    References listed on IDEAS

    as
    1. Judith Eidenberger & Vanessa Redak & Eva Ubl, 2019. "Who puts our financial system at risk? A methodological approach to identify banks with potential significant negative effects on financial stability," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 37, pages 57-72.
    2. Judith Eidenberger & David Liebeg & Stefan W. Schmitz & Reinhardt Seliger & Michael Sigmund & Katharina Steiner & Peter Strobl & Eva Ubl, 2014. "Macroprudential Supervision: A Key Lesson from the Financial Crisis," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 27, pages 83-94.
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    More about this item

    Keywords

    financial stability; macroprudential supervision; resolution; systemically important banks; systemic scenario;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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