Sensitivity of credit risk stress test results: Modelling issues with an application to Belgium

Stijn Ferrari, Patrick Van Roy and Cristina Vespro

Journal of Financial Stability, 2021, vol. 52, issue C

Abstract: This paper assesses the sensitivity of solvency stress testing results to the choice of credit risk variable and level of data aggregation at which the stress test is conducted. In practice, both choices are often determined by technical considerations, such as data availability. Using data for the Belgian banking system, we find that the impact of a stress test on banks’ Tier 1 ratios can differ substantially depending on the credit risk variable considered, but much less so on the level of aggregation. If solvency stress tests are going to be used as a supervisory tool or to set regulatory capital requirements, there is a need to further harmonise their execution across institutions and supervisors in order to enhance comparability. This is certainly relevant in the context of the EU-wide stress tests, where institutions often use different credit risk variables (and levels of data aggregation) to estimate the impact of the common methodology and macroeconomic scenario on their capital level and supervisors rely on different models to quality assure and validate banks’ results. More generally, there is also a need to improve the availability and quality of the data to be used for stress testing purposes.

Keywords: Stress tests; Credit risk; Sensitivity analysis; Capital requirements; Modelling choices (search for similar items in EconPapers)
JEL-codes: C52 G21 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Sensitivity of credit risk stress test results: Modelling issues with an application to Belgium (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:52:y:2021:i:c:s1572308920301042

DOI: 10.1016/j.jfs.2020.100805

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