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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)
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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Publisher 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

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: banking; credit risk; stress tests;

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. repec:fth:bfdipa:6/2001 is not listed on IDEAS
  2. Til Schuermann & Bjoern-Jakob Treutler & Scott M. Weiner & M. Hashem Pesaran, 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Tudela, Merxe & Garry Young, 2003. "A Merton Model Approach to Assessing the Default Risk of UK Public Companies," Royal Economic Society Annual Conference 2003 207, Royal Economic Society. [Downloadable!]
    Other versions:
  4. Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  5. Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
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  7. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January. [Downloadable!] (restricted)
    Other versions:
  8. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Research Discussion Papers 6/2001, Bank of Finland. [Downloadable!]
  9. Gertjan W. Vlieghe, . "Indicators of fragility in the UK corporate sector," Bank of England working papers 146, Bank of England. [Downloadable!]
  10. Giovanni Majnoni & Maria Soledad Martinez Peria & Winfrid Blaschke & Matthew T. Jones, 2001. "Stress Testing of Financial Systems: An Overview of Issues, Methodologies, and FSAP Experiences," IMF Working Papers 01/88, International Monetary Fund. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Miroslav Misina & David Tessier, 2008. "Non-Linearities, Model Uncertainty, and Macro Stress Testing," Working Papers 08-30, Bank of Canada. [Downloadable!]
  2. Martin Cihák, 2007. "Introduction to Applied Stress Testing," IMF Working Papers 07/59, International Monetary Fund. [Downloadable!]
  3. cipollini, andrea & missaglia, giuseppe, 2007. "Dynamic Factor analysis of industry sector default rates and implication for Portfolio Credit Risk Modelling," MPRA Paper 3582, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Åsberg Sommar, Per & Shahnazarian, Hovick, 2008. "Macroeconomic Impact on Expected Default Frequency," Working Paper Series 219, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  5. Jan Willem van den End & Marco Hoeberichts & Mostafa Tabbae, 2006. "Modelling Scenario Analysis and Macro Stress-testing," DNB Working Papers 119, Netherlands Central Bank, Research Department. [Downloadable!]
  6. Gabriel Jiménez & Javier Mencía, 2007. "Modeling the distribution of credit losses with observable and latent factors," Banco de España Working Papers 0709, Banco de España. [Downloadable!]
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