Macroprudential Stress Testing of Credit Risk: A Practical Approach for Policy Makers

Daniel Buncic () and Martin Melecký ()

No 1139, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materialising credit risk. We apply the proposed approach to a set of Eastern European banks and discuss the results.

Keywords: Supervision; Stress Test; Individual Bank Data; Eastern Europe (search for similar items in EconPapers)
JEL-codes: G28 E58 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-tra
Date: 2011-09
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1139.pdf (application/pdf)

Related works:
Working Paper: Macroprudential stress testing of credit risk: a practical approach for policy makers (2012)
Working Paper: Macroprudential stress testing of credit risk: A practical approach for policy makers (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:usg:econwp:2011:39

Access Statistics for this paper

More papers in Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science
Contact information at EDIRC.
Series data maintained by Martina Flockerzi ().