Stress testing German banks in a downturn in the automobile industry

Klaus Düllmann and Martin Erdelmeier

No 2009,02, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre

Abstract: In this paper we stress-test credit portfolios of 28 German banks based on a Mertontype multi-factor credit risk model. The ad-hoc stress scenario is an economic downturn in the automobile industry that constitutes an exceptional but plausible event suggested by historical data. Rather than on a particular stress forecast, the focus of the paper is on the main drivers of the stress impact on banks' credit portfolios. Although the percentage of loans in the automobile sector is relatively low for all banks in the sample, the expected loss conditional on the stress event increases substantially by 70%-80% for the total portfolio. This result confirms the need to account for hidden sectoral concentration risk because the increase in expected loss is driven mainly by correlation effects with related industry sectors. Therefore, credit risk dependencies between sectors have to be adequately captured even if the trigger event is confined to a single sector. Finally, we calculate the impact on banks' own funds ratios. The main results are robust against various robustness checks, namely those concerning the granularity of the credit portfolio, the level of inter-sector asset correlations, and a cross-sectional variation of intra-sector asset correlations. --

Keywords: Asset correlation; portfolio credit risk; stress test; sectoral credit concentration (search for similar items in EconPapers)
JEL-codes: G21 G33 C13 C15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-rmg
Date: 2009

Downloads: (external link)
http://econstor.eu/bitstream/10419/27685/1/593852451.PDF (application/pdf)

Related works:
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:zbw:bubdp2:200902

Access Statistics for this paper

More papers in Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre
Contact information at EDIRC.
Series data maintained by ZBW - German National Library for Economics ().