Macroprudential Stress Testing of Credit Risk: A Practical Approach for Policy Makers
Journal
Journal of Financial Stability
ISSN
1572-3089
ISSN-Digital
1878-0962
Type
journal article
Date Issued
2013-09-03
Author(s)
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 materializing credit risk. The authors apply the proposed approach to a set of Eastern European banks and discuss the results.
Language
English
Keywords
Macroprudential supervision
Stress test
Individual bank data
Eastern Europe
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
9
Number
3
Start page
347
End page
370
Pages
24
Subject(s)
Division(s)
Eprints ID
236412