Macroprudential Stress Testing of Credit Risk: A Practical Approach for Policy Makers

Daniel Buncic and Martin Melecký

No 1139, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materialising credit risk. We apply the proposed approach to a set of Eastern European banks and discuss the results.

Keywords: Supervision; Stress Test; Individual Bank Data; Eastern Europe (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2011-09
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-tra
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Citations: View citations in EconPapers (6)

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http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-1139.pdf (application/pdf)

Related works:
Journal Article: Macroprudential stress testing of credit risk: A practical approach for policy makers (2013)
Working Paper: Macroprudential stress testing of credit risk: a practical approach for policy makers (2012)
Working Paper: Macroprudential stress testing of credit risk: A practical approach for policy makers (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2011:39

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