IMF calls for tougher 'stress testing'

PUBLISHED : Saturday, 06 October, 2012, 12:00am
UPDATED : Saturday, 06 October, 2012, 4:44am

The International Monetary Fund wants countries to improve stress tests on banks and other major financial institutions to identify risk channels and consider low-probability events that could have dire consequences.

There had been "major improvements" in the ways supervisors assessed whether banks could withstand shocks, yet changes put in place during the past few years did not go far enough to protect the financial system, the IMF said in an August report that was made public yesterday.

"Shortcomings are particularly notable in these areas: identifying the channels of risk propagation, using the investors' viewpoint and focusing on tail risks," the IMF said.

These weaknesses reflected analytical shortcomings and implementation difficulties, it said.

"Closing these gaps is the key priority for the community of stress-testing practitioners today," the IMF said.

It also urged the authorities to "speak smarter, not just louder" about test results.

Financial turmoil that began in the United States in 2008 and contributed to the euro zone's sovereign debt crisis has caused economic havoc around the world. The banking system's near-collapse has helped to trigger the worst recession since the second world war.

The IMF praised methods developed by the Dutch central bank and the Hong Kong Monetary Authority to tackle solvency and liquidity risks. It also praised the US Federal Reserve's tests in 2009 for "restoring confidence" and making it easier for investors to evaluate financial firms.

By contrast, European Union stress tests last year failed to reassure investors or identify imminent risks, the IMF said. It cited the case of Dexia, the Belgian bank that passed a stress test and failed soon afterward.

The EU's top banking regulator on Thursday told the bloc's lenders to hold on to more than €200 billion (HK$2 trillion) in capital raised to pave the way for tougher global standards.