# 1. Introduction

The assessment of banking system stability in emerging and developing economies (EMDEs) is often impaired by the lack of reliable and complete financial data. Most systemic risk measures, such as the Conditional Value at Risk (Adrian & Brunnermeier, 2016), the Marginal Expected Shortfall (Acharya et al., 2017; Acharya et al., 2017), or the Expected Capital Shortfall (Brownlees & Engle, 2017) rely on detailed market data which are not readily available in most EMDEs. In addition, market data primarily cover large listed commercial banks and thus may not capture challenges at unlisted banks (including mutual banks or state-owned banks), whose potential distress could still be relevant for systemic banking sector resilience.

In this paper, we develop a simple and transparent country-level metric, the Consolidated Distance to Breakpoint (CDBP), which provides a basic approximation of system-wide bank resilience to credit shocks. We start from a simple “reverse stress test” framework and apply it to basic bank-level accounting data. We then focus on the tail of the most vulnerable banks in the system and propose a new aggregate metric of systemic distress.

Our new metric quantifies the rise in non-performing loans (NPLs) necessary to trigger undercapitalization in a subset of the most fragile banks that collectively represent at least 20 percent of banking system assets (“Banks at Risk”), a threshold commonly associated with a systemic banking crisis (see Reinhart, 2021a, for a taxonomy of financial crises). The larger the necessary rise in NPLs, the more resilient the banking system appears to be.

We only focus on credit risk, the most common source of financial instability in EMDEs, although banks often face a wide range of other risks, including liquidity, foreign exchange, and market risks. Other relevant factors are also not considered, including contagion and second-round effects, implications of contingent liabilities, and the strength of the bank resolution framework. Therefore, our framework is inherently limited in scope and should ideally be complemented with additional stress tests and quantitative and qualitative supervisory information.

To illustrate the potential application of this new metric of systemic banking resilience, we explore the value added of the CDBP during the COVID-19 pandemic. The spread of COVID-19 prompted many policy makers to introduce a wide range of policy support measures including debt moratoria, credit guarantees, and regulatory forbearance (Feyen et al., 2021), which has rendered bank balance sheets less transparent in some jurisdictions. In this context, we apply our CDBP framework to offer preliminary evidence of systemic bank resilience based on data of over 1,500 banks in 59 EMDEs.

To evaluate the value added of the CDBP, we investigate its empirical association with commonly used country-level macro-financial and soundness indicators. The results of these preliminary analyses show that this new metric may contain additional information not already encapsulated in these commonly used indicators, suggesting that it could complement them. As such, the CDBP could be used for basic monitoring purposes, particularly in countries with limited availability of reliable financial data.

In the remainder of the paper, we first cover methodological aspects and describe assumptions, caveats, and limitations. We then apply the framework to bank data covering the pandemic episode and relate the CDBP measure to several macro-fiscal indicators and financial soundness indicators. The last section concludes.

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