Stress Testing of Banking Systems in the Region

Until recently, the international financial community was focused on the financial crisis in the United States. However, the IMF's recent Global Financial Stability Review (IMF 2009a) points out that the banking crisis is global. In this context, it is instructive to analyze the condition of the various banking systems in East Asia to get a sense of the capital shortfalls. The analysis uses banking data provided by Bankscope, which raises at least three issues. First, the data are neither as timely (they are for 2007) nor as comprehensive as one would expect. Second, due to differences in national regulatory regimes, as well as accounting and taxation regimes, the data on capital, equity, and nonperforming assets are not strictly comparable across countries. Third, not all of the financial institutions report comprehensive data. Therefore, it took considerable effort to analyze the data. As a result, the findings need to be interpreted with caution; they should be considered indicative, but not conclusive.

The calculations of the projected capital shortfall for the East Asia and Pacific region use conservative assumptions: a leverage ratio of Tier 1 capital to assets of 5%,³ nonperforming loans of 8% of assets,⁴ and 100% coverage ratio of reserves to nonperforming loans (Table 8 [ PDF 10.7KB | 1 page ]). The findings are as follows: the stress tests suggest that the majority of the banking systems are able to absorb a shock, but will require more capital to do so. The largest banking systems in East Asia, however, have almost US$1.2 trillion in Tier 1 capital, and the prospective capital shortfall could be as high as US$758 billion. The largest estimated Tier 1 shortfalls are as follows: Korea (US$44.5 billion), the PRC (US$109.1 billion), and Japan (US$518.8 billion). A surprising finding is that the Philippines and Thailand would not require additional capital.

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