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The recent crisis has spurred the use of stress tests as a (crisis) management and early warning tool. However, a weakness is that they omit potential risks embedded in the banking groups’ geographical structures by assuming that capital and liquidity are available wherever they are needed within the group. This assumption neglects the fact that regulations differ across countries (e.g., minimum capital requirements), and, more importantly, that home/host regulators might limit flows of capital or liquidity within a group during periods of stress. This study presents a framework on how to integrate this risk element into stress tests, and provides illustrative calculations on the size of the potential adjustments needed in the presence of some limits on intragroup flows for banks included in the June 2011 EBA stress tests.

Finance --- Business & Economics --- International Finance --- Banks and banking, International --- Banks and banking --- Risk management --- Econometric models. --- Agricultural banks --- Banking --- Banking industry --- Commercial banks --- Depository institutions --- International banking --- Offshore banking (Finance) --- Transnational banking --- Financial institutions --- Money --- Financial institutions, International --- International finance --- Banks and Banking --- Finance: General --- International Lending and Debt Problems --- Financial Aspects of Economic Integration --- International Financial Markets --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Financial services law & regulation --- Stress testing --- Countercyclical capital buffers --- Foreign banks --- Financial sector policy and analysis --- Financial regulation and supervision --- Capital adequacy requirements --- Cross-border banking --- Financial services --- Financial risk management --- Asset requirements --- Banks and banking, Foreign --- Czech Republic