A Study on the Stability of Korean Banks' Household Lending Sector: A Stress Test under a Macroeconomic Credit Risk Model (in Korean)

Heung Bae Chun (), Jung-Jin Lee () and Woon Youl Choi ()
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Heung Bae Chun: The Bank of Korea
Jung-Jin Lee: Sogang University
Woon Youl Choi: Sogang University

Economic Analysis (Quarterly), 2008, vol. 14, issue 2, 71-100

Abstract: This study measures to what extent exceptionally adverse changes of macroeconomic variables, such as business composite index and unemployment rate, may affect the credit loss of commercial banks' household loan portfolios. It also analyzes the risk-bearing capacity of Korean banks in the face of such macroeconomic shocks. The model underlying the stress tests presented in this study is based on CreditPortfolioView, a macroeconomic credit risk model developed by McKinsey & Co. The simulation results of the respective scenarios show that a cyclical shock has the greatest impact on the default probability and the loss distribution. Meanwhile, the unexpected loss after fourth-quarter period at the 99% level amounts to 4.1% of banks' household loan exposures under an extremely stressed scenario in which a cyclical shock, an unemployment shock, and a price shock take place simultaneously. This would mean a decline in the average BIS capital adequacy ratio of commercial banks from 12.3% at the end of 2006 to 10.8% at the end of next year. The BIS ratio, however, would still be higher than the 8% minimum. This result suggests that, even if the extreme economic stress conditions experienced in the late 1990s were to be repeated, Korean banks' risk-bearing capacity of household lending sector should be more than adequate.

Keywords: Stress Test; Household Lending; Credit Portfolio View (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2008
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