Stress testing credit risk: a survey of authorities' approaches
AbstractThis paper reviews the quantitative methods used at selected central banks to 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). Stress testing credit risk is an essential element of the Basel II Framework; because of their financial stability perspective, central banks and supervisors are particularly interested in quantifying the macro-to-micro linkages and have developed a specific modeling expertise in this field. In assessing current macro stress testing practices, the paper highlights the more recent developments and a number of methodological challenges that may be useful for supervisors in their review process of the banks' stress test models as required by the Basel II Framework. It also contributes to the on-going macroprudential research efforts that aim to integrate macroeconomic oversight and prudential supervision, in the direction of early identification of key vulnerabilities and assessment of macro-financial linkages.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 37.
Date of creation: Dec 2008
Date of revision:
Macro stress testing; financial stability; macro-prudential analysis; credit risk; probability of default;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-10 (All new papers)
- NEP-BAN-2009-01-10 (Banking)
- NEP-FMK-2009-01-10 (Financial Markets)
- NEP-MAC-2009-01-10 (Macroeconomics)
- NEP-RMG-2009-01-10 (Risk Management)
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- Varotto, Simone, 2012. "Stress testing credit risk: The Great Depression scenario," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3133-3149.
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