2023-09-21-IMF-Banks_Joint_Exposure_to_Market_and_Run_Risk_26页_2mb

Summary of Banks’ Joint Exposure to Market and Run Risk

Introduction

The paper analyzes how liquidity risk and solvency risk interact through large liability withdrawals, which can erode bank capital. Using a high-level risk assessment for a global sample of 1,288 banks across 47 countries, the study highlights that recent bank failures, such as in the U.S., underscore the danger of liquidity-solvency interactions.

Key Findings

• Vulnerability to joint market and run risk varies significantly across banks, primarily due to differences in cash buffers, capitalization, securities holdings, and exposure to market risk.
• Advanced economies (AEs) exhibit higher exposure compared to emerging market and developing economies (EMDEs), reflecting lower cash reserves, securities holdings, and capital buffers in AEs.
• Within AEs, larger banks are most vulnerable due to greater reliance on wholesale funding and thinner capital buffers. In contrast, in EMDEs, smaller banks face higher risk because of higher costs of funds, less sticky liabilities, and lower security holdings.
• Estimated losses are highly concentrated, with the median bank unaffected in moderate scenarios, but significant losses for the most exposed banks (e.g., losses exceeding 20% of equity in a severe run scenario).
• Recent shocks, such as debt crises in EMDEs, amplify losses, though monetary policy also plays a role.

Methodology

The authors simulate withdrawal scenarios (10–30% of deposits for vulnerable banks) and assess mark-to-market losses on assets by:

• Calculating indicative asset valuations using sovereign bond data.
• Comparing losses relative to equity across banks.
• Considering sensitivity to assumptions on holding-to-maturity securities, asset duration, and withdrawal dynamics.

Implications

• Bank-level losses expose fragilities, suggesting policymakers should enhance supervision, prepare contingency plans, and encourage robust cash and capital buffers to mitigate risks.
• Data limitations and simplifications in the model may overstate losses, but the findings underscore the need for country-specific granular data to improve risk assessments.

This analysis broadly informs global financial stability efforts, emphasizing the interconnectedness of market and run risks in diverse economic contexts.