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Assessing portfolio credit risk changes in a sample of EU large and complex banking groups in reaction to macroeconomic shocks

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  • Castrén, Olli
  • Fitzpatrick, Trevor
  • Sydow, Matthias

Abstract

In terms of regulatory and economic capital, credit risk is the most significant risk faced by banks. We implement a credit risk model - based on publicly available information - with the aim of developing a tool to monitor credit risk in a sample of large and complex banking groups (LCBGs) in the EU. The results indicate varying credit risk profiles across these LCBGs and over time. Furthermore, the results show that large negative shocks to real GDP have the largest impact on the credit risk profiles of banks in the sample. Notwithstanding some caveats, the results demonstrate the potential value of this approach for monitoring financial stability. JEL Classification: C02, C19, C52, C61, E32

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Paper provided by European Central Bank in its series Working Paper Series with number 1002.

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Date of creation: Feb 2009
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Handle: RePEc:ecb:ecbwps:20091002

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Keywords: macroeconomic shock measurement; Portfolio credit risk measurement; stress testing;

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  1. Michael B. Gordy, 1998. "A comparative anatomy of credit risk models," Finance and Economics Discussion Series 1998-47, Board of Governors of the Federal Reserve System (U.S.).
  2. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
  3. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2006. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Computing in Economics and Finance 2006 47, Society for Computational Economics.
  4. Marco Sorge, 2004. "Stress-testing financial systems: an overview of current methodologies," BIS Working Papers 165, Bank for International Settlements.
  5. Thomas C. Wilson, 1998. "Portfolio credit risk," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 71-82.
  6. Castrén, Olli & Dées, Stéphane & Zaher, Fadi, 2008. "Global macro-financial shocks and expected default frequencies in the euro area," Working Paper Series 0875, European Central Bank.
  7. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Koenker, Roger & Bassett, Gilbert, Jr, 1982. "Robust Tests for Heteroscedasticity Based on Regression Quantiles," Econometrica, Econometric Society, vol. 50(1), pages 43-61, January.
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Cited by:
  1. NUCU, Anca Elena, 2011. "Managementul riscului de creditare: realizari actuale, analiza critica, sugestii
    [Credit risk management: current achievements, critical analysis, suggestions]
    ," MPRA Paper 27932, University Library of Munich, Germany.
  2. Peter Sarlin & Henrik J. Nyman, 2013. "Modeling public collaborative processes: The case of safeguarding financial stability," Papers 1312.7545, arXiv.org.
  3. Martín Saldías, 2011. "A Market-based Approach to Sector Risk Determinants and Transmission in the Euro Area," Working Papers w201130, Banco de Portugal, Economics and Research Department.
  4. Martín Saldías, 2011. "Sectoral credit risk in the euro area," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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