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Stress Testing Credit Risk: A Survey of Authorities' Aproaches

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  • Antonella Foglia

    (Banking and Financial Supervision, Bank of Italy)

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    Abstract

    This paper reviews the quantitative methods developed at selected authorities for 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). Authorities with a mandate for financial stability are particularly interested in quantifying the macro-to-micro linkages and have developed specific modeling expertise in this field. Stress testing credit risk is also an essential element of the Basel II framework, and some stress-testing requirements of Basel II are formulated by making explicit reference to the economic cycle. The paper highlights recent developments in macro stress testing and details a number of methodological challenges that may be useful for supervisors in their review process of banks’ models as required by Basel II. It also contributes to the ongoing macroprudential research efforts to integrate macroeconomic oversight and prudential supervision, for early detection of key vulnerabilities and assessment of macro-financial linkages.

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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 5 (2009)
    Issue (Month): 3 (September)
    Pages: 9-45

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    Handle: RePEc:ijc:ijcjou:y:2009:q:3:a:1

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    Web page: http://www.ijcb.org/

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    1. Marcucci, Juri & Quagliariello, Mario, 2008. "Is bank portfolio riskiness procyclical: Evidence from Italy using a vector autoregression," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 46-63, February.
    2. M. Hashem Pesaran & Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & April, . "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Center for Financial Institutions Working Papers 03-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Maria Soledad Martinez Peria & Giovanni Majnoni & Matthew T. Jones & Winfrid Blaschke, 2001. "Stress Testing of Financial Systems," IMF Working Papers 01/88, International Monetary Fund.
    4. Michael Boss & Gerald Krenn & Claus Puhr & Martin Summer, 2006. "Systemic Risk Monitor: A Model for Systemic Risk Analysis and Stress Testing of Banking Systems," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 11, pages 83-95.
    5. Miroslav Misina & David Tessier, 2008. "Non-Linearities, Model Uncertainty, and Macro Stress Testing," Working Papers 08-30, Bank of Canada.
    6. Jorge A. Chan-Lau, 2006. "Fundamentals-Based Estimation of Default Probabilities: A Survey," IMF Working Papers 06/149, International Monetary Fund.
    7. Paul Louis Ceriel Hilbers & Matthew T. Jones & Graham L. Slack, 2004. "Stress Testing Financial Systems," IMF Working Papers 04/127, International Monetary Fund.
    8. Sebastiano Laviola & Juri Marcucci & Mario Quagliariello, 2006. "Stress testing credit risk: experience from the italian FSAP," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 269-291.
    9. Jan Willem van den End & Marco Hoeberichts & Mostafa Tabbae, 2006. "Modelling Scenario Analysis and Macro Stress-testing," DNB Working Papers 119, Netherlands Central Bank, Research Department.
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    Cited by:
    1. Buncic, Daniel & Melecky, Martin, 2013. "Macroprudential stress testing of credit risk: A practical approach for policy makers," Journal of Financial Stability, Elsevier, vol. 9(3), pages 347-370.
    2. Alex Ferrer & José Casals & Sonia Sotoca, 2014. "Conditional coverage and its role in determining and assessing long-term capital requirements," Documentos de Trabajo del ICAE 2014-12, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    3. Covas, Francisco B. & Rump, Ben & Zakrajšek, Egon, 2014. "Stress-testing US bank holding companies: A dynamic panel quantile regression approach," International Journal of Forecasting, Elsevier, vol. 30(3), pages 691-713.
    4. Ricardo Schechtman & Wagner Piazza Gaglianone, 2011. "Macro Stress Testing of Credit Risk Focused on the Tails," Working Papers Series 241, Central Bank of Brazil, Research Department.
    5. Mencía, Javier, 2012. "Assessing the risk-return trade-off in loan portfolios," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1665-1677.
    6. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia, & Elizabeth Martin, & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410 Central Bank of Chile.
    7. Jorge A. Chan-Lau, 2013. "Market-Based Structural Top-Down Stress Tests of the Banking System," IMF Working Papers 13/88, International Monetary Fund.
    8. Vazquez, Francisco & Tabak, Benjamin M. & Souto, Marcos, 2012. "A macro stress test model of credit risk for the Brazilian banking sector," Journal of Financial Stability, Elsevier, vol. 8(2), pages 69-83.
    9. Claudio Borio & Mathias Drehmann & Kostas Tsatsaronis, 2012. "Stress-testing macro stress testing: does it live up to expectations?," BIS Working Papers 369, Bank for International Settlements.
    10. Heiko Hesse & Ferhan Salman & Christian Schmieder, 2014. "How to Capture Macro-Financial Spillover Effects in Stress Tests?," IMF Working Papers 14/103, International Monetary Fund.
    11. Andrea Nobili & Francesco Zollino, 2012. "A structural model for the housing and credit markets in Italy," Temi di discussione (Economic working papers) 887, Bank of Italy, Economic Research and International Relations Area.
    12. Adam Gersl & Petr Jakubik & Tomas Konecny & Jakub Seidler, 2013. "Dynamic Stress Testing: The Framework for Assessing the Resilience of the Banking Sector Used by the Czech National Bank," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(6), pages 505-536, December.
    13. Vasilios Manesiotis, 2011. "Numerical fiscal rules in practice," Economic Bulletin, Bank of Greece, Economic Research Department, issue 35, pages 7-13, June.
    14. Cerutti, Eugenio & Schmieder, Christian, 2014. "Ring fencing and consolidated banks’ stress tests," Journal of Financial Stability, Elsevier, vol. 11(C), pages 1-12.

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