Companies (GLCs), and vice-versa • Interbank, bond, forex and derivative market vulnerabilities arising from bank and NBFI failures 2 • Impact of global and regional contagion risks on Malaysia’s FIs and financial system III. Interconnectedness Similar to stress test scenarios used by regulators and banks, but taken to the extreme . It assumes failures occur. Impact analysis of the failure on stakeholders (e.g. financial system, banks, NBFIs, GLCs) Action plan is drawn to address the risk and trigger point identified RRP If impact is critical to stakeholders’ operations/ functions A form of BCM Documentation and monitoring Source: IMF and PwC 1 Source: FSA-JP, ‘Annual Supervisory Annual Supervisory Policy for Major Banks for Program Year 2013’ 2 Includes individual and multiple bank failures and conventional and Islamic FI failures Chart: How interconnectedness fits within the RRP process
Recovery & Resolution Planning 45 Macroeconomic & financial Shocks Key Assumptions and range of shock parameters Malaysia GDP • More severe than 2009 economic contraction Revenue • More than 40 percent decline in different revenue segments Credit Risk • More severe PD and LGD for different loan portfolios, e.g. doubling of current PD, higher downturn LGD than historical experience • Acceleration in the utilisation of committed and contingent facilities of up to 100 percent Market Risk • Extreme decline in FTSE Bursa Malaysia KLCI • Sharp depreciation in eight major currencies against the ringgit • Interest rate rise shocks (up to 250bp) across different tenures To help regulators and FIs identify the appropriate triggers, there are three distinct groups to note: 1. Stress indicators, for example: • Increase in interbank spreads, credit spreads, and Malaysian Government Security spreads • Volatility in Bursa Malaysia and bond market 2. Vulnerability indicators, for example: • Increase in loan deposit ratios • Drop in credit ratings • Drop in property prices 3. Resilience indicators, which are indicators of how the FIs will be affected in the event of adverse shock. These will normally be capital, shareholders’ funds and asset quality indicators. IV. Trigger groups The stress test scenarios and shock parameters used by BNM, as shown in the table below, can serve as a reference for identifying trigger points for Malaysian FIs. The appropriate selection of the triggers will depend, among others, on the structural characteristics of the financial system or FIs, and regulator and FI preferences regarding comprehensiveness and coverage. Table: BNM scenario-based stress test assumptions and shock parameters For stress tests in general, BNM’s scenarios give some leeway. However, key areas of focus include: significant increase in probability of default (PD) and loss given default (LGD) as well as interest rates (up to 250bp) and major currency depreciation.
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- Summer '16
- Management, Bank run, financial crises