Banking stress scenarios for public debt projections

The latest economic and financial crisis has shown how quickly vulnerabilities on the financial side of the economy can turn into a strong deterioration of public accounts, thus highlighting the importance to monitor fiscal risks arising outside the realm of public finances. This is particularly the...

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Bibliographic Details
Published in:European Economy. Economic Papers 2015, Vol.548, April 2015
Main Authors: Benczur, Peter, Berti, Katia, Cariboni, Jessica, Di Girolamo, Francesca Erica, Langedijk, Sven, Pagano, Andrea, Petracco Giudici, Marco
Format: Article
Language:English
Subjects:
banking
economic analysis
economic forecasting
fiscal policy
monetary crisis
public debt
simulation
Online Access:Get full text
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Summary:The latest economic and financial crisis has shown how quickly vulnerabilities on the financial side of the economy can turn into a strong deterioration of public accounts, thus highlighting the importance to monitor fiscal risks arising outside the realm of public finances. This is particularly the case for the building up of risks in the banking sector, due to its central role in financial stability. In this spirit, this paper presents banking stress-test scenarios for public debt projections based on SYMBOL, a Monte Carlo micro-simulation model that allows obtaining losses from simulated bank defaults, using actual bank balance-sheet information. The estimated bank losses are used to assess the size of the potential impact on government deficit and gross public debt that feed into a debt projection model, allowing drawing conclusions in terms of projected public debt dynamics. The methodology for the stress tests proposed here has three major advantages. First, it allows distinguishing between simulated bank losses and bank recapitalisation needs (particularly relevant in that public funds used to cover the latter could be recouped later by selling the financial assets acquired). Secondly, through the use of bank-level balance-sheet data, country-specific features of national banking systems are accounted for, while remaining within a common conceptual framework. Thirdly, the approach allows reflecting in the designed stress tests the institutional changes (bail-in, elements of Basel III, the resolution fund) along the path leading to the full implementation of the banking union legislation. Results for a selected group of EU countries are presented in the paper based on end-2013 bank balance-sheet data.
ISSN:1725-3187
1725-3187