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This paper explains the treatment of sovereign risk in macroprudential solvency stress testing, based on the experiences in the Financial Sector Assessment Program (FSAP). We discuss four essential steps in assessing the system-wide impact of sovereign risk: scope, loss estimation, shock calibration, and capital impact calculation. Most importantly, a market-consistent valuation approach lies at the heart of assessing the resilience of the financial sector in a tail risk scenario with sovereign distress. We present a flexible, closed-form approach to calibrating haircuts based on changes in expected sovereign defaults affecting bank solvency during adverse macroeconomic conditions. This paper demonstrates the effectiveness of using extreme value theory (EVT) in this context, with empirical examples from past FSAPs.

Financial risk management. --- Liquidity (Economics) --- Banks and banking. --- Agricultural banks --- Banking --- Banking industry --- Commercial banks --- Depository institutions --- Finance --- Financial institutions --- Money --- Assets, Frozen --- Frozen assets --- Risk management --- Banks and Banking --- Finance: General --- Money and Monetary Policy --- Investments: Bonds --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Interest Rates: Determination, Term Structure, and Effects --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- General Financial Markets: General (includes Measurement and Data) --- Financial services law & regulation --- Monetary economics --- Investment & securities --- Credit risk --- Stress testing --- Yield curve --- Credit default swap --- Financial regulation and supervision --- Bond yields --- Financial sector policy and analysis --- Financial services --- Financial risk management --- Interest rates --- Banks and banking --- Credit --- Bonds --- United Kingdom

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More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective. Negative interest rates have so far supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound is less binding than previously thought. However, interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand. Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB’s balance sheet rather than substantial additional reductions in the policy rate.

Interest rates --- Monetary policy --- Inflation (Finance) --- Economic development --- Development, Economic --- Economic growth --- Growth, Economic --- Economic policy --- Economics --- Statics and dynamics (Social sciences) --- Development economics --- Resource curse --- Finance --- Natural rate of unemployment --- Monetary management --- Currency boards --- Money supply --- Money market rates --- Rate of interest --- Rates, Interest --- Interest --- Bank soundness --- Banking --- Banks and Banking --- Banks and banking --- Banks --- Central bank policy rate --- Central Banks and Their Policies --- Deposit rates --- Depository Institutions --- Finance: General --- Financial markets --- Financial sector policy and analysis --- Financial services --- General Financial Markets: General (includes Measurement and Data) --- General Financial Markets: Government Policy and Regulation --- Interest Rates: Determination, Term Structure, and Effects --- Micro Finance Institutions --- Monetary economics --- Monetary Policy --- Money and Monetary Policy --- Money market --- Money markets --- Mortgages --- Negative interest rates --- Switzerland

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This paper provides a conceptual overview of key aspects of the design and implementation of solvency stress testing of Islamic banks. Based on existing regulatory standards and prudential practice, the paper explains how Islamic finance principles and their impact on various risk drivers affect the capital assessment of asset-oriented financial intermediation under stress. The formal specification of these risk factors helps operationalize and integrate the stress testing of Islamic banks within established frameworks for financial stability analysis.

Banks and Banking --- Finance: General --- Islamic Banking and Finance --- Central Banks and Their Policies --- General Financial Markets: Government Policy and Regulation --- Comparative Analysis of Economic Systems --- Other Economic Systems: Public Economics --- Financial Economics --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Banking --- Financial services law & regulation --- Finance --- Islamic banking --- Market risk --- Credit risk --- Stress testing --- Financial services --- Financial regulation and supervision --- Financial sector policy and analysis --- Islamic finance --- Financial risk management --- Banks and banking --- Islamic countries --- Iran, Islamic Republic of

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Prudential regulation of infrastructure investment plays an important role in creating an enabling environment for mobilizing long-term finance from institutional investors, such as insurance companies, and, thus, gives critical support to sustainable development. Infrastructure projects are asset-intensive and generate predictable and stable cash flows over the long term, with low correlation to other assets; hence they provide a natural match for insurers' liabilities-driven investment strategies. The historical default experience of infrastructure debt suggests a "hump-shaped" credit risk profile, which converges to investment grade quality within a few years after financial close-supported by a consistently high recovery rate with limited cross-country variation in non-accrual events. However, the resilient credit performance of infrastructure-also in emerging market and developing economies-is not reflected in the standardized approaches for credit risk in most regulatory frameworks. Capital charges would decline significantly for a differentiated regulatory treatment of infrastructure debt as a separate asset class. Supplementary analysis suggests that also banks would benefit from greater differentiation, but only over shorter risk horizons, encouraging a more efficient allocation of capital by shifting the supply of long-term funding to insurers.

Banking Regulation --- Basel III --- Credit Risk --- Education --- Educational Sciences --- Energy --- Energy and Environment --- Energy Demand --- Finance and Financial Sector Development --- Financial Crisis Management & Restructuring --- Financial Structures --- Infrastructure --- Insurance Capital Standard --- Insurance Regulation --- Project Finance --- Solvency --- Solvency Regime --- Transport

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Islamic lending transactions are governed by the precepts of the shariah, which bans interest and stipulates that income must be derived as return from entrepreneurial investment. Since Islamic finance is predicated on asset backing and specific credit participation in identified business risk, structuring shariah-compliant securitization seems straightforward. This paper explains the fundamental legal principles of Islamic finance, which includes the presentation of a valuation model that helps distil the essential economic characteristics of shariah-compliant synthetication of conventional finance. In addition to a brief review of the current state of market development, the examination of pertinent legal and economic implications of shariah compliance on the configuration of securitization transactions informs a discussion of the most salient benefits and drawbacks of Islamic securitization.

Investments: General --- Money and Monetary Policy --- Public Finance --- Islamic Banking and Finance --- Other Economic Systems: Public Economics --- Financial Economics --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: General (includes Measurement and Data) --- Taxation, Subsidies, and Revenue: General --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Investment & securities --- Finance --- Public finance & taxation --- Monetary economics --- Islamic finance --- Securitization --- Securities --- Legal support in revenue administration --- Credit --- Banks and banking --- Islamic countries --- Asset-backed financing --- Financial instruments --- Revenue --- Malaysia --- Bonds --- Religious aspects.