Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • Buncic, Daniel
  • Melecky, Martin

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 materializing credit risk. The authors apply the proposed approach to a set of Eastern European banks and discuss the results.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2012/01/05/000158349_20120105144231/Rendered/PDF/WPS5936.pdf
Download Restriction: no

Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5936.

as in new window
Length:
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:wbk:wbrwps:5936

Contact details of provider:
Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Email:
Web page: http://www.worldbank.org/
More information through EDIRC

Related research

Keywords: Banks&Banking Reform; Debt Markets; Currencies and Exchange Rates; Economic Theory&Research; Bankruptcy and Resolution of Financial Distress;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Sébastien Wälti, 2005. "The duration of fixed exchange rate regimes," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp96, IIIS.
  2. Antonella Foglia, 2009. "Stress Testing Credit Risk: A Survey of Authorities' Aproaches," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 9-45, September.
  3. Ivanov Ventzislav & Kilian Lutz, 2005. "A Practitioner's Guide to Lag Order Selection For VAR Impulse Response Analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 9(1), pages 1-36, March.
  4. 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, Wharton School Center for Financial Institutions, University of Pennsylvania 03-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. Huang, Xin & Zhou, Hao & Zhu, Haibin, 2012. "Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(3), pages 193-205.
  6. Reuven Glick & Michael Hutchison, 1999. "Banking and currency crises; how common are twins?," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Sep.
  7. Anginer, Deniz & Demirguc-Kunt, Asli, 2014. "Has the global banking system become more fragile over time?," Journal of Financial Stability, Elsevier, Elsevier, vol. 13(C), pages 202-213.
  8. Xin Huang & Hao Zhou & Haibin Zhu, 2009. "A framework for assessing the systemic risk of major financial institutions," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-37, Board of Governors of the Federal Reserve System (U.S.).
  9. Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers, Financial Markets Group dp627, Financial Markets Group.
  10. Cihák, Martin & Schaeck, Klaus, 2010. "How well do aggregate prudential ratios identify banking system problems?," Journal of Financial Stability, Elsevier, Elsevier, vol. 6(3), pages 130-144, September.
  11. Peura, Samu & Jokivuolle, Esa, 2004. "Simulation based stress tests of banks' regulatory capital adequacy," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(8), pages 1801-1824, August.
  12. Virolainen , Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Research Discussion Papers, Bank of Finland 18/2004, Bank of Finland.
  13. Thomas Breuer & Martin Jandacka & Klaus Rheinberger & Martin Summer, 2009. "How to find plausible, severe, and useful stress scenarios," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 150, Oesterreichische Nationalbank (Austrian Central Bank).
  14. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 441-479, December.
  15. Alain Laurin & Giovanni Majnoni, 2003. "Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries," World Bank Publications, The World Bank, number 15157, August.
  16. 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, Elsevier, vol. 26(2-3), pages 445-474, March.
  17. Fungácová, Zuzana & Jakubík, Petr, 2012. "Bank stress tests as an information device for emerging markets: The case of Russia," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 3/2012, Bank of Finland, Institute for Economies in Transition.
  18. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 1-48, February.
  19. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  20. Buncic, Daniel, 2009. "Understanding forecast failure in ESTAR models of real exchange rates," MPRA Paper 13121, University Library of Munich, Germany.
  21. Ricardo Schechtman & Wagner Piazza Gaglianone, 2011. "Macro Stress Testing of Credit Risk Focused on the Tails," Working Papers Series, Central Bank of Brazil, Research Department 241, Central Bank of Brazil, Research Department.
  22. Douglas Laxton & Susanna Mursula & Michael Kumhof & Dirk Muir, 2010. "The Global Integrated Monetary and Fiscal Model (GIMF)," IMF Working Papers 10/34, International Monetary Fund.
  23. Brand, Claus & Buncic, Daniel & Turunen, Jarkko, 2006. "The impact of ECB monetary policy decisions and communication on the yield curve," Working Paper Series, European Central Bank 0657, European Central Bank.
  24. Melecky, Martin & Podpiera, Anca Maria, 2010. "Macroprudential stress-testing practices of central banks in central and south eastern Europe : an overview and challenges ahead," Policy Research Working Paper Series 5434, The World Bank.
  25. repec:pra:mprapa:16525 is not listed on IDEAS
  26. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2008. "Empirical Properties Of Closed- And Open-Economy Dsge Models Of The Euro Area," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 12(S1), pages 2-19, April.
  27. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series, European Central Bank 1192, European Central Bank.
  28. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
  29. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 155-183, February.
  30. Buncic, Daniel & Melecky, Martin, 2007. "An estimated New Keynesian policy model for Australia," MPRA Paper 4138, University Library of Munich, Germany.
  31. Papke, Leslie E. & Wooldridge, Jeffrey M., 2008. "Panel data methods for fractional response variables with an application to test pass rates," Journal of Econometrics, Elsevier, Elsevier, vol. 145(1-2), pages 121-133, July.
  32. MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank, Research Centre.
  33. Marco Sorge, 2004. "Stress-testing financial systems: an overview of current methodologies," BIS Working Papers 165, Bank for International Settlements.
  34. Gabriele Galati & Richhild Moessner, 2011. "Macroprudential policy - a literature review," BIS Working Papers 337, Bank for International Settlements.
  35. Marcella Lucchetta & Gianni De Nicoló, 2012. "Systemic Real and Financial Risks," IMF Working Papers 12/58, International Monetary Fund.
  36. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  37. Gabriel Jiménez & Jesús Saurina, 2006. "Credit Cycles, Credit Risk, and Prudential Regulation," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
  38. Christian Schmieder & Maher Hasan & Claus Puhr, 2011. "Next Generation Balance Sheet Stress Testing," IMF Working Papers 11/83, International Monetary Fund.
  39. Edward I. Altman & Andrea Resti & Andrea Sironi, 2002. "The link between default and recovery rates: effects on the procyclicality of regulatory capital ratios," BIS Working Papers 113, Bank for International Settlements.
  40. Menzie D. Chinn & Guy Meredith, 2005. "Testing Uncovered Interest Parity at Short and Long Horizons during the Post-Bretton Woods Era," NBER Working Papers 11077, National Bureau of Economic Research, Inc.
  41. Adrian Blundell-Wignall & Paul Atkinson, 2010. "Thinking beyond Basel III: Necessary Solutions for Capital and Liquidity," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(1), pages 9-33.
  42. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Buncic, Daniel & Melecky, Martin, 2013. "Equilibrium credit : the reference point for macroprudential supervisors," Policy Research Working Paper Series 6358, The World Bank.
  2. 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, Czech National Bank, Research Department 2012/11, Czech National Bank, Research Department.
  3. Petr Jakubík & Thomas Reininger, 2013. "Determinants of Nonperforming Loans in Central, Eastern and Southeastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 48-66.
  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, Charles University Prague, Faculty of Social Sciences, vol. 63(6), pages 505-536, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:5936. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.