Stress testing of probability of default of individuals

Petr Kadeřábek, Aleš Slabý and Josef Vodička

Prague Economic Papers, 2008, vol. 2008, issue 4, 340-355

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: credit risk; stress testing; banking; probability of default (search for similar items in EconPapers)
JEL-codes: E21 E32 G21 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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DOI: 10.18267/j.pep.336

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