A framework to analyse the sovereign credit risk exposure of financial institutions

Jide Lewis

Journal of Risk Management in Financial Institutions, 2015, vol. 8, issue 2, 130-146

Abstract: Government and banking activities can be closely intertwined so that instability in one entity can spread contagiously to the other. This paper develops an integrative dynamic framework to evaluate the exposure of banks to sovereign credit risk using stress tests. The framework incorporates three main types of agents: banks, a government, and a rating agency where both the banking agent and the government agent can default on their financial obligations. Both banks and the government agent are subject to cognitive biases and use heuristics to make their decisions. The measures of macro-financial stability evaluated in the framework are the time-path of the external debt ratio, the probability of sovereign default, the fiscal balance and the bank's capital adequacy ratio. The framework is used to replicate the historical twin-crisis dynamics that ensues when stress tests are implemented on selected macro-financial variables, based on a perfect foresighting exercise for the case of Jamaica.

Keywords: stress testing; sovereign debt crises; feedback; bank failure; twin sovereign and banking crises (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hstalks.com/article/1783/download/ (application/pdf)
https://hstalks.com/article/1783/ (text/html)
Requires a paid subscription for full access.

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: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2015:v:8:i:2:p:130-146

Access Statistics for this article

More articles in Journal of Risk Management in Financial Institutions from Henry Stewart Publications
Bibliographic data for series maintained by Henry Stewart Talks ().