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Forecasting Banks’ Corporate Loan Losses Under Stress: A New Corporate Default Model

Gabriel Bruneau (), Thibaut Duprey and Ruben Hipp

No 122, Technical Reports from Bank of Canada

Abstract: We develop a corporate default model to forecast corporate loan losses of the Canadian banking sector under stress. First, we tackle a data gap by reconstructing historical default probabilities for banks’ loan portfolios. Second, we estimate tail elasticities to capture non-linear relationships between macrofinancial conditions and default probabilities. By explicitly modelling default probabilities associated with macroeconomic tail events, this model significantly improves the Bank of Canada’s stress-testing infrastructure.

Keywords: Economic models; Financial institutions; Financial stability; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: C22 C53 G17 G28 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-rmg
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