Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materializing credit risk. The authors apply the proposed approach to a set of Eastern European banks and discuss the results.

This paper studies institutional structures of prudential and business conduct supervision of financial services in 98 high and middle income countries over the past decade. It identifies possible drivers of changes in these supervisory structures using the panel ordered probit analysis. The results show that (i) more developed, small open economies with better public governance tend to integrate their supervision, especially the prudential one; (ii) more financially developed countries integrate more their supervision; however, greater development of the non-bank financial system leads to less integrated prudential supervision but not business conduct supervision; (iii) the lobbying power of concentrated and highly profitable banking sectors significant hinders business conduct integration; (vi) countries that experienced financial crises integrate their supervisory structure relatively more and (v) greater central bank independence could cause less integration of prudential supervision, but not necessarily of business conduct supervision.

Equilibrium credit is an important concept because it helps to identify excessive credit provision in an economy. This paper proposes a structural approach to determine equilibrium credit which is based on the long-run through-the-cycle transaction demand for credit. Using a panel data set consisting of 49 high and middle-income countries from 1980 to 2010, we show that there exists considerable variation in the cross-country estimates of the income and price elasticities of credit and that the unit elasticity restriction implicitly imposed by the credit-to-GDP ratio is strongly rejected by the data. This suggests that the credit-to-GDP ratio is not appropriate to measure equilibrium credit. We show further that the cross-sectional variation in the income and price elasticities of credit can be related to a set of relevant economic, financial and institutional development indicators of a country. The main determinants that explain the cross-sectional variation in the income and price elasticities are financial depth, access to financial services, use of capital markets, efficiency and funding of domestic banks, central bank independence, the degree of supervisory integration, and the experience of a financial crisis. As an empirical illustration, we compute equilibrium credit and credit gaps for eleven new EU member states using our structural framework and compare it to credit gaps based on the Basel III approach.