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Stress testing German banks against a global cost-of-capital shock

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  • Duellmann, Klaus
  • Kick, Thomas

Abstract

This paper introduces a stress test of the corporate credit portfolios of 24 large German banks by a two-stage approach: First, a macro-econometric model is used to forecast the impact of a substantial increase of the user cost of business capital for firms worldwide on three particularly export-oriented industry sectors in Germany. Second, the impact of this economic multi-sector stress on banks' credit portfolios is captured by a state-of-theart CreditMetrics-type portfolio model with sector-dependant unobservable risk factors as drivers of the systematic risk. The German credit register provides us with access to highly granular risk information on loan volumes and banks' internal estimates of default probabilities which is key for an accurate assessment of the impact of the stress scenario. We find that the increase of the capital charge for the unexpected loss needs to be considered together with the increase in banks' expected losses in order to assess the change of banks' capital ratios. We also confirm that highly granular information on the level of borrowerspecific probabilities of default has a significant impact on the outcome of the stress test. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 04/2012.

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Date of creation: 2012
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Handle: RePEc:zbw:bubdps:042012

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Keywords: Asset correlation; portfolio credit risk; macroeconomic stress tests;

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  1. Klaus Düllmann & Nancy Masschelein, 2007. "A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios," Journal of Financial Services Research, Springer, Springer, vol. 32(1), pages 55-79, October.
  2. Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2005. "Using Market Information for Banking System Risk Assessment," MPRA Paper 817, University Library of Munich, Germany.
  3. Klaus Duellmann & Martin Erdelmeier, 2009. "Crash Testing German Banks," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 139-175, September.
  4. Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series, European Central Bank 0092, European Central Bank.
  5. De Graeve, F. & Kick, T. & Koetter, M., 2008. "Monetary policy and financial (in)stability: An integrated micro-macro approach," Journal of Financial Stability, Elsevier, Elsevier, vol. 4(3), pages 205-231, September.
  6. Thomas Breuer & Martin Jandacka & Klaus Rheinberger & Martin Summer, 2009. "How to Find Plausible, Severe and Useful Stress Scenarios," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 205-224, September.
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