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Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America

Author

Listed:
  • Mr. Jorge A Chan-Lau
  • Cheng Hoon Lim
  • Jose Daniel Rodríguez-Delgado
  • Mr. Bennett W Sutton
  • Melesse Tashu

Abstract

This paper suggests a novel approach to assess corporate sector solvency risk. The approach uses a Bottom-Up Default Analysis that projects probabilities of default of individual firms conditional on macroeconomic conditions and financial risk factors. This allows a direct macro-financial link to assessing corporate performance and facilitates what-if scenarios. When extended with credit portfolio techniques, the approach can also assess the aggregate impact of changes in firm solvency risk on creditor banks’ capital buffers under different macroeconomic scenarios. As an illustration, we apply this approach to the corporate sector of the five largest economies in Latin America.

Suggested Citation

  • Mr. Jorge A Chan-Lau & Cheng Hoon Lim & Jose Daniel Rodríguez-Delgado & Mr. Bennett W Sutton & Melesse Tashu, 2017. "Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America," IMF Working Papers 2017/133, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/133
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    Cited by:

    1. Natalia Nehrebecka, 2021. "COVID-19: stress-testing non-financial companies: a macroprudential perspective. The experience of Poland," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(2), pages 283-319, June.

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