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Macro stress testing with a macroeconomic credit risk model for Finland

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Author Info

  • Virolainen , Kimmo

    ()
    (Bank of Finland Research)

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    Abstract

    In the discussion paper, we employ data on industry-specific corporate sector bankruptcies over the time period from 1986 to 2003 and estimate a macroeconomic credit risk model for the Finnish corporate sector. The sample period includes a severe recession with significantly higher-than-average default rates in the early 1990s. The results suggest a significant relationship between corporate sector default rates and key macroeconomic factors including GDP, interest rates and corporate indebtedness. The estimated model is employed to analyse corporate credit risks conditional on current macroeconomic conditions. Furthermore, the paper presents some examples of applying the model to macro stress testing, ie analysing the effects of various adverse macroeconomic events on the banks’ credit risks stemming from the corporate sector. The results of the stress tests suggest that Finnish corporate sector credit risks are fairly limited in the current macroeconomic environment.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0418.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 18/2004.

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    Length: 48 pages
    Date of creation: 18 Jul 2004
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2004_018

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
    More information through EDIRC

    Related research

    Keywords: banking; credit risk; stress tests;

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    References

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    1. M. Hashem Pesaran & Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & April, . "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Center for Financial Institutions Working Papers 03-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. 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.
    3. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
    4. repec:onb:oenbwp:y:2002:i:3:b:3 is not listed on IDEAS
    5. M. Tudela & G. Young, 2005. "A Merton-Model Approach To Assessing The Default Risk Of Uk Public Companies," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(06), pages 737-761.
    6. repec:sae:niesru:v:139:y::i:1:p:88-94 is not listed on IDEAS
    7. Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements.
    8. Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002. "Ratings migration and the business cycle, with application to credit portfolio stress testing," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 445-474, March.
    9. Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2006. "Internal ratings systems, implied credit risk and the consistency of banks' risk classification policies," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1899-1926, July.
    10. Philip Bunn & Victoria Redwood, 2003. "Company accounts based modelling of business failures and the implications for financial stability," Bank of England working papers 210, Bank of England.
    11. repec:fth:bfdipa:6/2001 is not listed on IDEAS
    12. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Research Discussion Papers 6/2001, Bank of Finland.
    13. 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.
    14. Gertjan W. Vlieghe, 2001. "Indicators of fragility in the UK corporate sector," Bank of England working papers 146, Bank of England.
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