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Stress Testing the Corporate Loans Portfolio of the Canadian Banking Sector

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Author Info

  • Miroslav Misina
  • David Tessier
  • Shubhasis Dey

Abstract

Stress testing, at its most general level, is an investigation of the performance of an entity under abnormal operating conditions. The authors focus on one set of entities--the Canadian banking sector--and investigate losses in the loans portfolio of this sector as a function of changing circumstances in the different industries in which these loans reside. These circumstances are characterized by means of one summary measure--sectoral probabilities of default--and this measure is modelled as a function of macroeconomic variables. Using this model, the authors assess the interrelationship between the macroeconomic environment and sectoral defaults, and perform a series of stress tests under different scenarios that are thought to be most pertinent to Canada. The tools underlying the authors' analysis are general and can be applied to other countries, as well as to other macroeconomic scenarios.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 06-47.

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Length: 46 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bca:bocawp:06-47

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Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

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Keywords: Financial stability; Financial institutions;

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References

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  1. repec:onb:oenbwp:y:2002:i:3:b:3 is not listed on IDEAS
  2. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
  3. Harvir Kalirai & Martin Scheicher, 2002. "Macroeconomic Stress Testing: Preliminary Evidence for Austria," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 58-74.
  4. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, 2005. "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England.
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Cited by:
  1. Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2010. "The financial accelerator in an evolving credit network," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1627-1650, September.
  2. Thomas Breuer & Martin Jandačka & Javier Mencía & Martin Summer, 2010. "A systematic approach to multi-period stress testing of portfolio credit risk," Banco de Espa�a Working Papers 1018, Banco de Espa�a.
  3. Ramdane Djoudad & Étienne Bordeleau, 2013. "Méthodologie de construction de séries de taux de défaut pour l’industrie canadienne," Discussion Papers 13-2, Bank of Canada.
  4. de Bandt, O. & Bruneau, C. & El Amri, W., 2008. "Stress testing and corporate finance," Journal of Financial Stability, Elsevier, vol. 4(3), pages 258-274, September.
  5. Gauthier, Céline & Lehar, Alfred & Souissi, Moez, 2012. "Macroprudential capital requirements and systemic risk," Journal of Financial Intermediation, Elsevier, vol. 21(4), pages 594-618.
  6. Jiménez, Gabriel & Mencía, Javier, 2009. "Modelling the distribution of credit losses with observable and latent factors," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 235-253, March.
  7. Miroslav Misina & David Tessier, 2008. "Non-Linearities, Model Uncertainty, and Macro Stress Testing," Working Papers 08-30, Bank of Canada.

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