Stress Testing of Probability of Default of Individuals

Petr Kadeřábek (), Aleš Slabý () and Josef Vodička ()
Additional contact information
Petr Kadeřábek: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic, http://ies.fsv.cuni.cz/
Aleš Slabý: Komerční banka, a.s, http://www.kb.cz/
Josef Vodička: Komerční banka, a.s, http://www.kb.cz/

No 2008/11, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This paper introduces a model for stress testing of probability of default of individuals. The model rests on assumption that the individual defaults if his savings fall below zero. The probability of default is then described as a function of several macroeconomic indicators such as wages, unemployment and interest rates. Stress testing is carried out by applying exogenous stress scenarios for development of these indicators. The model implies that sensitivity of probability of default to the stress is mainly driven by Installment to Income Ratio and for mortgages also by loan maturity. Hence Installment to Income ratio is suggested as the appropriate tool to manage credit risk of retail portfolios.

Keywords: banking; credit risk; stress testing; probability of default (search for similar items in EconPapers)
JEL-codes: E21 E32 G21 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2008-07, Revised 2008-07
New Economics Papers: this item is included in nep-ban, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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