IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Macroeconomic and Financial Stability: Stress Testing of the Impacts of Macroeconomic Shocks on Credit/Asset Quality of Banking System in Kuwait based on Macro Econometric Model of Kuwait

Listed author(s):
  • Asraul HOQUE
Registered author(s):

    The importance of financial sector came to the forefront with the onset of the global financial crisis in 2007-08, and it was understood that the costs are immense if the instability of the financial sector spreads to the real sector. Thus, maintaining macroeconomic stability and financial stability concurrently becomes now a major target and a challenge for policy makers. Financial policy makers, in turn, have given more emphasis on macro prudential analysis, which has focused on the ability of banks to withstand macroeconomic shocks based on stress tests. We carry out macroeconomic stress testing for Kuwaiti banking system to understand and assess the resilience and vulnerability of the banks as a whole in Kuwait. We build a macro model of Kuwait for the purpose, and then estimate a Credit Risk Satellite Model to carry out the stress testing. Simulation of macro model variables produces a range of future economic and financial variables such as GDP, PC, PI, CPI, M2, and CRD etc in the first stage. We estimate the Satellite Model that links, in the second stage of stress testing, NPL (non-performing loans as measure of credit risk) to the predicted macro model variables, thus mapping external shocks onto banks’ asset quality shocks. Finally, we make various assumptions about macro shocks in terms of domestic policy shocks as well as external shocks to generate baseline and recession scenarios to assess if deliberate introduction of adverse economic conditions produce any vulnerability or instability in the banking system in Kuwait. We conclude that scenario of mild recession will not produce any banking crisis in Kuwait, but more adverse conditions would produce just a little vulnerability, but not a financial crisis.

    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.usc.es/~economet/journals1/aeid/aeid15211.pdf
    Download Restriction: Access restricted to subscribers. Free on line subscription for universities from low income countries. More information at http://www.usc.es/economet/info.htm

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

    Volume (Year): 15 (2015)
    Issue (Month): 2 ()
    Pages: 147-160

    as
    in new window

    Handle: RePEc:eaa:aeinde:v:15:y:2015:i:2_11
    Contact details of provider: Web page: http://www.usc.es/economet/eaa.htm

    Order Information: Web: http://www.usc.es/economet/info.htm Email:


    No references listed on IDEAS
    You can help add them by filling out this form.

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

    When requesting a correction, please mention this item's handle: RePEc:eaa:aeinde:v:15:y:2015:i:2_11. 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: (M. Carmen Guisan)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.