Credit Risk Stress Testing: An Exercise for Colombian Banks

Wilmar Cabrera (), Javier Gutiérrez Rueda and Juan Mendoza

Temas de Estabilidad Financiera from Banco de la Republica de Colombia

Abstract: In this paper we seek to assess the ability of banks to withstand the e?ects of an increase in credit risk as a result of changes in the macroeconomic environment. To do so we estimate a credit risk model for each loan type as a function of four macroeconomic variables commonly used in the literature. Then, we forecast the dynamics of non-performing loans (NPL) and total loans in a stressed scenario in a time span of 8 quarters. Using these results, we quantify the e?ects of the macroeconomic shock on bank’s performance indicators, such as the NPL ratio, the return on assets, and the capital adequacy ratio. The results suggest that most Colombian banks are able to withstand a large shock to economic activity. We also perform a reverse stress testing to quantify how much NPL should increase in order to bring the earnings before taxes to zero.

Keywords: Credit; Risk; Stress; Testing:; An; Exercise; for; Colombian; Banks (search for similar items in EconPapers)
JEL-codes: C25 D22 G21 G33 (search for similar items in EconPapers)
Date: 2012-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bdr:temest:073

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