Systemic Macro Financial Risk Analysis

This course, presented by the IMF’s Monetary and Capital Markets Department, provides a comprehensive overview of the theories, tools, and techniques necessary for in depth assessment of financial sector surveillance and banking-sovereign interactions and feedbacks. Topics to be covered include: 

• extracting information from balance sheets and market information; 

• in-depth tools for systemic risk monitoring; 

• risk adjusted balance sheets for corporates and financial institutions using Contingent Claims Analysis (CCA); 

• credit risk and funding costs had how they are affected by balance sheet and market risk appetite changes; 

• systemic risk assessment using various models, pros and cons, and a taxonomy showing how they are related; 

• sovereign risk adjusted balance sheet calibration; 

• enhanced macro stress testing using CCA; 

• macro financial risk analysis and joint bank-sovereign stress testing; 

• modeling interlinkages and feedback between macro variables, and corporate, banking, household, and sovereign risk indicators; 

• analysis for country cases when high frequency and some market data are available; and 

• analysis that can be carried out in more data constrained countries (country case studies and workshops with spreadsheets will be included).

Course Objectives: Upon completion of this course, participants should be able to: 

• Explain how to use balance sheet and market information to construct risk indicators for corporate, household and financial sectors and sovereigns to measure and monitor sector and systemic risk. 

• Describe how to calibrate risk-adjusted balance sheets for corporates, banks, non-bank financials, and sovereigns using CCA and related techniques. 

• Understand tools and data needed to carry out in-depth systemic risk monitoring. 

• Define the data inputs, outputs, and applications of several types of systemic risk models, the pros and cons of the models, and how these models relate to each other. This would include CoVaR, MES, Granger causality, Marginal Expected Shortfall, S-RISK and Systemic CCA. 

• Build models that relate macro variables to the time series of risk indicators, including CCA risk indicators (expected default probabilities, credit spreads, expected losses, and contingent liabilities) and be able to carry out: 

• enhanced macro stress testing, which complements and supplements traditional macro stress testing for banks, with funding cost analysis and supplementary capital shortfall and soundness measures. 

• analysis of sensitivities and feedback between macro variables and bank/banking sector, corporate sector, household, and sovereign risk indicators. This would include the use of factor, VAR, FAVAR, GVAR and other models. 

• analysis of risk transmission from banks to sovereigns via contingent liabilities and from sovereigns to banks from direct holdings of sovereign debt and indirect impact on banks of sovereign spreads on bank funding costs; and 

• joint bank and sovereign macro stress testing.