Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America

Jorge Chan-Lau, Cheng Lim, Jose Daniel Rodríguez-Delgado, Bennett Sutton and Melesse Tashu

No 2017/133, IMF Working Papers from International Monetary Fund

Abstract: This paper suggests a novel approach to assess corporate sector solvency risk. The approach uses a Bottom-Up Default Analysis that projects probabilities of default of individual firms conditional on macroeconomic conditions and financial risk factors. This allows a direct macro-financial link to assessing corporate performance and facilitates what-if scenarios. When extended with credit portfolio techniques, the approach can also assess the aggregate impact of changes in firm solvency risk on creditor banks’ capital buffers under different macroeconomic scenarios. As an illustration, we apply this approach to the corporate sector of the five largest economies in Latin America.

Keywords: WP; firm; return on assets; interest rate; Macro-financial; default risk; corporate sector; bank capital; forward intensity models; economic scenarios; simulation; loss distribution; debt ratio; asset correlation; bank capital data; correlation value; loan default; coverage ratio; PD contribution; asset value of the loan obligor; debt maturity; asset ratio; Loans; Commercial banks; Liquidity management; Commodity prices; Global (search for similar items in EconPapers)
Pages: 33
Date: 2017-06-08
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