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Stress testing credit risk: a survey of authorities' approaches

Antonella Foglia ()
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Antonella Foglia: Banca d'Italia

No 37, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper reviews the quantitative methods used at selected central banks to stress testing credit risk, focusing in particular on the methods used to link macroeconomic drivers of stress with bank specific measures of credit risk (macro stress test). Stress testing credit risk is an essential element of the Basel II Framework; because of their financial stability perspective, central banks and supervisors are particularly interested in quantifying the macro-to-micro linkages and have developed a specific modeling expertise in this field. In assessing current macro stress testing practices, the paper highlights the more recent developments and a number of methodological challenges that may be useful for supervisors in their review process of the banks' stress test models as required by the Basel II Framework. It also contributes to the on-going macroprudential research efforts that aim to integrate macroeconomic oversight and prudential supervision, in the direction of early identification of key vulnerabilities and assessment of macro-financial linkages.

Keywords: Macro stress testing; financial stability; macro-prudential analysis; credit risk; probability of default (search for similar items in EconPapers)
JEL-codes: E32 E37 G21 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-mac and nep-rmg
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Citations: View citations in EconPapers (6) Track citations by RSS feed

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