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Source: IMF – News in Russian

Tobias Adrian, James Morsink, and Liliana Schumacher February 5, 2020 (photo: heyfajrul / iStock by Getty Images) Now that the human community is gearing up for the potential devastating effects of climate change, assessing the magnitude of the shocks that could soon hit the economy is of great importance. One way to quantify the effects of shocks of a potentially systemic nature that the financial system may be exposed to is “stress tests” – well-established analytical procedures that have been used by the IMF, the World Bank and financial supervisors for decades to carry out detailed scenario planning of measures to prevent future financial crises. Measuring risks A recent IMF staff paper [include link] highlights the role of stress testing financial sustainability STI to climate risks as an important new tool. Climate stress tests allow you to determine what the consequences of the climate crisis will be for the financial system, both globally and at the level of individual countries. Stress tests show how the initial financial shock, for example, a slowdown in economic growth or a fall in property prices, it may, with increasing intensity, spread to the entire financial system. At the same time, the relations between financial institutions and the day-to-day functioning of the economy, between the problems of solvency and liquidity, between government bodies and financial organizations, as well as between financial institutions themselves are analyzed. Stress tests have long been able to answer the question of whether financial institutions such as banks and insurance companies, even in the most adverse scenarios, continue to provide vital financial services. Adding climate factors to the existing stress testing methodology will help heads of government and private sector enterprises prepare for a wide range of potential financial shocks that could be triggered by climate threats. Continuous Adaptation To maintain effectiveness, stress tests need to be constantly adapted to new risks. Initially, stress tests focused on the sustainability of individual financial institutions. The global financial crisis of 2007-2009 prompted an emphasis on stress testing methodologies aimed at quantifying risks for the financial system as a whole (the so-called “macroprudential” stress tests). Over the years, the IMF has also improved its macro-financial analysis and scenario research tools, extending stress testing to an additional number of threats. The IMF is testing the material risks associated with property damage, as well as transition risks arising from changes in policies and the technologies on which the global transition to a low-carbon economy depends. Recent improved stress tests provide insights into the potential impact of such risks on financial stability and economic growth. The potential material risks associated with natural disasters have already been analyzed in several IMF stress tests, especially for small island states such as Bahamas, Jamaica and Samoa. Natural disasters were used as shocks leading to adverse scenarios (for example, a severe hurricane leading to property damage and reduced tourism). Direct losses materialize as a result of the destruction or reduction of the value of assets and collateral, which affects the size of the positions of financial institutions in transactions with corporations and households. In some countries, total economic losses exceed 200 percent of GDP, as, for example, when Hurricane Maria hit Dominica in 2017. In the long term, stress tests to identify material risks will increasingly reflect the macroeconomic consequences of more frequent and more severe natural disasters. Stress testing of the transition to a low-carbon economy is a new and rapidly developing field. The departure of the global economy from industries that depend on non-renewable resources, such as the coal industry, is likely to be accompanied by shocks due to such a transition. Financial institutions may incur losses on operations with firms whose business model is not based on a low-carbon economy. Such firms may face declines in revenues, malfunctions and increased costs of financing due to implemented economic policies, technological changes and changes in the behavior of consumers and investors. Materialization of risks is possible, especially in the case of a sharp transition (due to inaction in the past) to a low-carbon economy and if such a transition is poorly thought out or not coordinated on a global scale. In the future, when developing stress tests for transition risks, the most important next step will be the identification of “second-order” effects, when a decrease in asset prices leads to their urgent sale, which results in an even greater decrease in asset prices, creating a vicious cycle and strengthening the mechanism of the initial shock Adding climate factors to stress tests will help policy makers, corporate executives, and investors anticipate climate-related threats. Thanks to this, the IMF and the World Bank can help bring valuable information to officials in various institutions, including central banks, supervisors, think tanks and academia, which will help prepare the human community for future emergencies, which will require an urgent and dynamic response. ***** Tobias Adrian – Financial Advisor and Director of the Department of Monetary Systems and Capital Markets (DCC) of the International Monetary Fund (IMF). In this capacity, he leads the IMF’s work in financial sector surveillance, monetary and macroprudential policies, financial regulation, debt management and capital markets. He also oversees capacity development activities in IMF member countries. Prior to joining the IMF, Mr. Adrian served as Senior Vice President of the Federal Reserve Bank of New York and Deputy Director of the Statistics Research Group. Mr. Adrian has taught at Princeton University and the University of New York and has many publications in economic and financial journals. including the American Economic Review, Journal of Finance, Journal of Financial Economics, and Review of Financial Studies. He holds a doctorate from the Massachusetts Institute of Technology, a master’s degree from the London School of Economics, a diploma from the University of Goethe in Frankfurt, and a bachelor’s degree from Dauphin University in Paris. He received a certificate of secondary education in literature and mathematics at the Humboldt School in Bad Homburg. James Morsink is Deputy Director of the Department of Monetary Systems and Capital Markets (DCC), responsible for assessing the state of the financial sector, as well as for the department’s strategy and resource management. Earlier, he was in charge of supervision on a bilateral basis (along with assessments of the financial sector). At the IMF, Mr. Morsink has been dealing with global macroeconomic and macro-financial issues for over 26 years. Throughout the 1990s, he dealt with the transition to a market economy in Mongolia, the financial crisis in Thailand, and banking turmoil in Japan. In the 2000s, he helped lead the development of the World Economic Outlook, and then led missions in the UK and Ireland and negotiated a stand-by loan agreement with Hungary and a credit line with Poland. He began working in the DCC in 2012, first as the head of the DDK strategy department and the head of the FSAP mission for Denmark in 2014. He was appointed Deputy Director in 2015. She holds a Bachelor’s degree from Princeton University and a PhD from the Massachusetts Institute of Technology. Liliana Schumacher is a senior economist at the IMF. She is the author of numerous works on financial stability, episodes of the mass withdrawal of bank deposits, performance indicators of banks and stress testing. Her work was published in the form of IMF working papers and in peer-reviewed economic and financial journals. She led FSAP assessments in Guatemala, Paraguay, Kosovo and Armenia and was Deputy FSAP Deputy Head for Singapore, Sweden, Spain and Latvia. She was also responsible for stress testing in many FSAP. Prior to joining the IMF, she was an assistant professor of international business at George Washington University. He holds a Ph.D. in economics from the University of Chicago.


EDITOR’S NOTE: This article is a translation from Russian Language to English.

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