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Stress testing credit risk: experience from the italian FSAP

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  • Sebastiano Laviola

    ()
    (Banca d'Italia, Vigilanza creditizia e finanziaria, Servizio Concorrenza normativa e affari generali, Roma (Italy))

  • Juri Marcucci

    ()
    (Banca d'Italia, Vigilanza creditizia e finanziaria, Servizio Concorrenza normativa e affari generali, Roma (Italy))

  • Mario Quagliariello

    ()
    (Banca d'Italia, Vigilanza creditizia e finanziaria, Servizio Concorrenza normativa e affari generali, Roma (Italy))

Abstract

In this paper we describe the methodologies that can be used for stress testing credit risk providing some applications to the Italian banking system.Within the FSAP for Italy, stress tests examined the impact of a variety of shocks on the nine major Italian banking groups. The tests were performed using both top-down and bottom-up approaches, which provided comparable results. For the sensitivity analysis, the size of the shocks to assess market risk, sovereign risk, interest rate rÌsk in the banking book and liquidity risk was in line with those ap-plied in other FSAPs for euro area countries, while the credit risk shock exceeded the largest historical shock. In addition, the impact of various adverse macroeconomic scenarios has been assessed. Specifical-ly, an adverse macro scenario in which oil prices reach USD 85-90 per barrel causing a global slow down and global equity prices decrease by 30% has the largest impact. Overall, stress test results suggest that the Italian banking sector is resilient to shocks. Profits appear in most cas-es sufficient to cover 10sses arising from the shocks calibrated. Existing capitaI buffers remain comfortably above the minimum regulatory sol-vency ratios. The implementation of macroeconomic stress-testing pro-grammes such as those underlying the FSAPs has advanced the devel-opment of internally consistent stress testing procedures. However, the state of the art is still evolving and further work in this field will allow relaxing less realistic assumptions, further improving the methodologies and making results more reliable.

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Bibliographic Info

Article provided by Banca Nazionale del Lavoro in its journal BNL Quarterly Review.

Volume (Year): 59 (2006)
Issue (Month): 238 ()
Pages: 269-291

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Handle: RePEc:psl:bnlaqr:2006:33

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Keywords: credit;

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References

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  1. Luca Casolaro & Leonardo Gambacorta, 2004. "Un modello dei conti economici per il sistema bancario italiano," Temi di discussione (Economic working papers) 519, Bank of Italy, Economic Research and International Relations Area.
  2. John Fell & Garry Schinasi, 2005. "Assessing Financial Stability: Exploring the Boundaries of Analysis," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192(1), pages 102-117, April.
  3. Fabrizio Fabi & Sebastiano Laviola & Paolo Marullo Reedtz, 2004. "The treatment of SMEs loans in the New Basel Capital Accord: some evaluations," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 57(228), pages 29-70.
  4. Paul Louis Ceriel Hilbers & Matthew T. Jones & Graham L. Slack, 2004. "Stress Testing Financial Systems," IMF Working Papers 04/127, International Monetary Fund.
  5. De Bandt, O. & Oung, V., 2004. "Assessment of “stress tests” conducted on the French banking system," Financial Stability Review, Banque de France, issue 5, pages 55-72, November.
  6. Fabrizio Fabi & Sebastiano Laviola & Paolo Marullo Reedtz, 2004. "The treatment of SMEs loans in the New Basel Capital Accord: some evaluations," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 57(228), pages 29-70.
  7. 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.
  8. Mario Quagliariello, . "Banks' Performance over the Business Cycle: A Panel Analysis on Italian Intermediaries," Discussion Papers 04/17, Department of Economics, University of York.
  9. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
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Cited by:
  1. Antonella Foglia, 2009. "Stress Testing Credit Risk: A Survey of Authorities' Aproaches," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 9-45, September.

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