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A Framework for Stress Testing Banks’ Credit Risk

In: The Banking Sector in Hong Kong

Author

Listed:
  • Jim Wong
  • Ka-Fai Choi
  • Tom Pak-Wing Fong

Abstract

Macro stress testing refers to a range of techniques used to assess the vulnerability of a financial system to ‘exceptional but plausible’ macroeconomic shocks.2 Increasingly, macro stress testing plays an important role in the macro-prudential analysis of public authorities. The main objective is to identify structural vulnerability and overall risk exposures in a financial system that could lead to systemic problems. In conjunction with stress testing to assess the vulnerability of the portfolios of individual institutions, macro stress testing forms the main part of system-wide analysis, which measures the risk exposure of a group of financial institutions to a specific stress scenario. It can also serve as a tool for cross-checking results obtained by financial institutions’ internal models.

Suggested Citation

  • Jim Wong & Ka-Fai Choi & Tom Pak-Wing Fong, 2008. "A Framework for Stress Testing Banks’ Credit Risk," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Hans Genberg & Cho-Hoi Hui (ed.), The Banking Sector in Hong Kong, chapter 11, pages 240-260, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-0-230-22737-8_11
    DOI: 10.1057/9780230227378_11
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    Citations

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    Cited by:

    1. Cağatay Başarır, 2016. "A Macro Stress Test Model of Credit Risk for the Turkish Banking Sector," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(12), pages 762-774, December.
    2. Avouyi-Dovi, S. & Bardos, M. & Jardet, C. & Kendaoui, L. & Moquet , J., 2009. "Macro stress testing with a macroeconomic credit risk model: Application to the French manufacturing sector," Working papers 238, Banque de France.
    3. Paolo Guarda & Abdelaziz Rouabah & John Theal, 2011. "An MVAR Framework to Capture Extreme Events in Macroprudential Stress Tests," BCL working papers 63, Central Bank of Luxembourg.
    4. Abdelaziz Rouabah & John Theal, 2010. "Stress testing: The impact of shocks on the capital needs of the Luxembourg banking sector," BCL working papers 47, Central Bank of Luxembourg.
    5. Chang Liu & Lin Tang & Dongtao Lin & Jiayi Guo, 2023. "Testing to extreme: An application of reverse stress testing engineering on mortgages of commercial banks in China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 187-192, January.
    6. Bo Jiang & Bruce Philp & Zhongmin Wu, 2018. "Macro stress testing in the banking system of China," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(4), pages 287-298, November.
    7. Javier Gutiérrez Rueda, 2010. "Un análisis de riesgo de crédito de las empresas del sector real y sus determinantes," Vniversitas Económica 8291, Universidad Javeriana - Bogotá.
    8. Michal Kováč, 2018. "Approaches to stress testing for regulatory purposes by institutions using the IRBA method [Konstrukce stres testu pro regulatorní účely modelem VEC]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2018(2), pages 43-59.
    9. Morone, Marco & Cornaglia, Anna, 2010. "An econometric model to quantify benchmark downturn LGD on residential mortgages," MPRA Paper 25588, University Library of Munich, Germany.
    10. Rui Pascoal, 2012. "Macroeconomic Factors of Household Default. Is There Myopic Behaviour?," GEMF Working Papers 2012-20, GEMF, Faculty of Economics, University of Coimbra.
    11. Hong Kong Monetary Authority, 2011. "Loan-to-value ratio as a macroprudential tool - Hong Kong SAR's experience and cross-country evidence," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 163-178, Bank for International Settlements.
    12. 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.
    13. Adams, Charles, 2008. "Emerging East Asian Banking Systems Ten Years after the 1997/98 Crisis," Working Papers on Regional Economic Integration 16, Asian Development Bank.
    14. Tom Pak-wing Fong & Chun-shan Wong, 2008. "Stress Testing Banks' Credit Risk Using Mixture Vector Autoregressive Models," Working Papers 0813, Hong Kong Monetary Authority.
    15. Wilmar Cabrera & Javier Gutiérrez Rueda & Juan Carlos Mendoza, 2012. "Credit Risk Stress Testing: An Exercise for Colombian Banks," Temas de Estabilidad Financiera 073, Banco de la Republica de Colombia.
    16. Abdelaziz Rouabah, 2007. "Mesure de la vulnérabilité du secteur bancaire luxembourgeois," BCL working papers 24, Central Bank of Luxembourg.
    17. Michal Kováč, 2018. "Comparison of stress testing models for regulatory purposes by institutions using the IRBA method [Porovnání stres test modelů pro regulatorní účely institucí využívajících IRBA metodu]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2018(3), pages 41-56.

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