| Abstract: |
The recent financial crisis emphasised the need for effective financial
stability analyses and tools for detecting systemic risk. This paper looks at
assessment of banking sector resilience through stress testing. We argue such
analyses are valuable even in emerging economies that suffer from limited data
availability, short time series and structural breaks. We propose a top-down
stress test methodology that employs relatively limited information to
overcome this data problem. Moreover, as credit growth in emerging economies
tends to be rather volatile, we rely on dynamic approach projecting key
balance sheet items. Application of our proposed stress test framework to the
Russian banking sector reveals a high sensitivity of the capital adequacy
ratio to the economic cycle that shows up in both of the two-year
macroeconomic scenarios considered: a baseline and an adverse one. Both
scenarios indicate the need for capital increase in the Russian banking
sector. Furthermore, given that Russia’s banking sector is small and
fragmented relative to advanced economies, the loss of external financing can
cause profound economic stress, especially for medium-sized and small
enterprises. The Russian state has a low public debt-to-GDP ratio and plays
decisive role in the banking sector. These factors allow sufficient fiscal
space for recapitalisation of problematic banks under both of our proposed
baseline and adverse scenarios. |