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Macroprudential stress testing of credit risk: A practical approach for policy makers

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  • Buncic, Daniel
  • Martin, Melecky

Abstract

Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materialising credit risk. We apply the proposed approach to a set of Eastern European banks and discuss the results.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33927.

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Date of creation: 28 Sep 2011
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Handle: RePEc:pra:mprapa:33927

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Keywords: Macroprudential Supervision; Stress Test; Individual Bank Data; Eastern Europe;

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Cited by:
  1. Reininger, Thomas & Jakubík, Petr, 2013. "Determinants of Nonperforming Loans in Central, Eastern and Southeastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3.
  2. Buncic, Daniel & Martin Melecky, 2013. "Equilibrium Credit: The Reference Point for Macroprudential Supervisors," Economics Working Paper Series 1301, University of St. Gallen, School of Economics and Political Science.
  3. Adam Gersl & Petr Jakubik & Tomas Konecny & Jakub Seidler, 2012. "Dynamic Stress Testing: The Framework for Testing Banking Sector Resilience Used by the Czech National Bank," Working Papers 2012/11, Czech National Bank, Research Department.
  4. Adam Gersl & Petr Jakubik & Tomas Konecny & Jakub Seidler, 2013. "Dynamic Stress Testing: The Framework for Assessing the Resilience of the Banking Sector Used by the Czech National Bank," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(6), pages 505-536, December.

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