Stress Testing at the IMF

Morsink, James; Zabczyk, Pawel

doi:10.5089/9781513520742.087

Cited by 20 publications

(9 citation statements)

References 17 publications

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“…Regulators and Congress are increasingly looking for empirical evidence on this topic to inform risk management policies for lenders and government sponsored enterprises (GSEs). And finally, there is mounting concern that climate change has the potential to trigger financial shocks across a range of markets; stress tests have been increasingly promoted as a tool to assess resilience to increasing natural disaster risk (Adrian et al, 2020). Applying a climate stress test to the mortgage industry will necessitate a detailed understanding of how loan outcomes respond to disaster events and how that varies with levels of damage and protective measures, such as insurance, which we examine here.…”

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confidence: 99%

Flood Damage and Mortgage Credit Risk: A Case Study of Hurricane Harvey

Kousky

Palim²,

Pan³

2020

Journal of Housing Research

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Using a unique, loan-level database that combines post-disaster home inspection data, flood zone designations, and loan performance measures in the area impacted by Hurricane Harvey, we examine the link between property damage, flood insurance, and mortgage credit risk. We find that compared with homes with no damage, loans on moderately to severely damaged homes are more likely to become 90 days delinquent shortly after Harvey. However, longer-term loan performance depends on whether the property is located in areas where borrowers are required to have flood insurance. Where flood insurance is required, loan prepayment rate rises with property damage. In areas where flood insurance is not required, and very few borrowers have flood insurance, we find that as property damage increases, the likelihood of needing a loan modification increases, as does the likelihood of a loan being 180 or more days delinquent or in default during the two years following Hurricane Harvey. Thus, our findings provide direct evidence that flood insurance protects homeowners and mortgage creditors against credit risk arising from flood events. KEYWORDS Flood risk; credit risk; natural disaster JEL CODES Q54; Q58; R20 Flooding is the costliest natural disaster in the United States and coastal flooding, often triggered by tropical storms or hurricanes, is particularly damaging. Costs from floods have been increasing over the past several decades and are projected to continue to do so from the combined effects of increased development and urbanization (Cutter et al., 2018) as well as climate changes including intensification of rainfall, changing storm patterns, and sea level rise (e.g.,

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confidence: 99%

Flood Damage and Mortgage Credit Risk: A Case Study of Hurricane Harvey

Kousky

Palim²,

Pan³

2020

Journal of Housing Research

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“…Macroeconometric models at central banks either do not include a financial sector, or include only linear financial accelerator mechanisms (Adrian 2020;Muellbauer 2020). At the same time, areas in charge of financial stability have constructed complex nonlinear stress testing frameworks (Burrows, Learmonth and McKeown 2012;Adrian, Morsink and Schumacher 2020;Correia et al 2020). When discussing the relationship between the Bank of England's macro modelling framework and their financial stability modelling, Hendry and Muellbauer (2018, p 311) state that:…”

Section: Appendix A: Literature Reviewmentioning

confidence: 99%

MARTIN Gets a Bank Account: Adding a Banking Sector to the RBA's Macroeconometric Model

Brassil¹,

Major²,

Rickards³

2022

RBA Research Discussion Papers

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We add a simplified banking sector to the RBA's macroeconometric model (MARTIN). How this banking sector interacts with the rest of the economy chiefly depends on the extent of loan losses. During small downturns, losses are absorbed by banks' profits and the resulting effect on the broader economy is limited to that caused by the lower shareholder returns (which is already part of MARTIN). During large downturns, loan losses reduce banks' capital, and banks respond by reducing their credit supply. This reduction in supply reduces housing prices, wealth and investment; thereby amplifying the downturn (which leads to further losses). Our state-dependent approach is a significant advance on the treatment of financial sectors within existing macroeconometric models. Having a banking sector in MARTIN allows us to explore important policy questions. In this paper, we show how the effectiveness of monetary policy depends on the state of the economy. During large downturns, monetary policy is more effective than usual because it can reduce loan losses and therefore moderate any reduction in credit supply. But at low interest rates, the zero lower bound on retail deposit interest rates reduces policy effectiveness. We also investigate how one of the more pessimistic economic scenarios that could have resulted from COVID-19 might have affected the banking sector, and subsequently amplified the resulting downturn.

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“…However, much of the present interest in the progressive possibilities for central bank leadership has followed on the back of nascent actions already underway at major central banks. Prior to the COVID-19 pandemic, the BoE, Bank of France and ECB in particular demonstrated a willingness to play a leading role in climate change governance (Carney, 2016; Carney et al., 2019), spurred on by international collaboration and international organizations (Adrian et al., 2020; Network for Greening the Financial System, 2019). Indeed, as the economic ramifications of the pandemic have unfolded and calls to ‘build back better’ have grown louder, commitments to this agenda have been publicly reaffirmed by some (Bailey et al., 2020; Khalaf and Arnold, 2020), supported through the publication of best practice technical advice aimed at all central banks (Network for Greening the Financial System, 2020a, 2020b).…”

Section: Capitalist Central Bankingmentioning

confidence: 99%

Central banks: Climate governors of last resort?

Langley

Morris

2020

Environ Plan A

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The global and regional leadership of central banks in response to the COVID-19 pandemic has heightened public and political debates over their role in the governance of an arguably more fundamental planetary crisis: the climate crisis. Strategically harnessing the resources and reach of central banks would seem crucial to achieving a genuine step-change in the governance of the climate crisis. We consider how critical social scientists might contribute to debates over the potential of central banks to act as ‘climate governors of last resort’.

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Stress Testing at the IMF

Abstract: Stress Testing at the IMF

Cited by 20 publications

References 17 publications

Flood Damage and Mortgage Credit Risk: A Case Study of Hurricane Harvey

Flood Damage and Mortgage Credit Risk: A Case Study of Hurricane Harvey

MARTIN Gets a Bank Account: Adding a Banking Sector to the RBA's Macroeconometric Model

Central banks: Climate governors of last resort?

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