Ring fencing and consolidated banks’ stress tests

Eugenio Cerutti and Christian Schmieder

Journal of Financial Stability, 2014, vol. 11, issue C, 1-12

Abstract: The recent crisis has spurred the use of bank stress tests as a crisis management and early warning tool. However, a weakness is that current stress tests are based on consolidated balance sheets, and thus omit potential risks embedded in banking groups’ geographical structures by assuming that capital and liquidity are available wherever they are needed within the group. This study presents a framework to integrate ring fencing and regulatory differences (e.g., minimum capital requirements) into cross-border bank stress tests. Case studies show how some forms of ring fencing—home or host regulators limiting flows of capital and income within a group—could significantly increase banks’ capital needs.

Keywords: Ring fencing; Stress testing; Cross-border banking; Stability; Subsidiaries (search for similar items in EconPapers)
JEL-codes: F34 F36 G15 G21 G28 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:11:y:2014:i:c:p:1-12

DOI: 10.1016/j.jfs.2013.10.003

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