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Default, Credit Growth, and Asset Prices

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Author Info
Miguel A. Segoviano Basurto
Boris Hofmann
C. A. E. Goodhart
Abstract

This paper uses a Merton-type estimate of the probability of default (PoD) for the main banks in a sample of Organization for Economic Cooperation and Development and middle-income countries as a proxy for the fragility of their banking systems. Based on theory and stylized facts, the paper explores a range of financial and real variables that explain such PoDs across time. We find property price fluctuations and bank credit to be important explanatory factors. There is two-way interaction between these variables and a clearer relationship when the variables are entered as a deviation from trend. The lag structure between such developments and PoDs is long and varies widely across countries. The paper assesses the implications of these findings for economic policy.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/223.

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Length: 43 pages
Date of creation: 16 Oct 2006
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Handle: RePEc:imf:imfwpa:06/223

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Keywords: Probability of default ; credit risk ; systemic risk ; macroeconomic shocks ; stress testing ; financial surveillance ; Credit risk ; Asset prices ; Financial assets ; Bank credit ; Economic policy ; Economic models ;

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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. Stéphanie Stolz & Marina Moretti & Mark Swinburne, 2008. "Stress Testing at the IMF," IMF Working Papers 08/206, International Monetary Fund. [Downloadable!]
  2. Miguel A. Segoviano Basurto & C. A. E. Goodhart, 2009. "Banking Stability Measures," IMF Working Papers 09/4, International Monetary Fund. [Downloadable!]
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