Macroeconomic determinants of credit risk: Recent evidence from a cross country study
The study of financial stability has become the cornerstone of modern macroeconomic policy particularly for developed countries. The recent global financial crisis has underscored the importance of understanding financial instability especially in the context of managing credit risk with particular emphasis on the banking sector. The key motivation for this paper is to improve our understanding of credit risk modelling at the country level especially under the framework of Basel II capital adequacy standards. The aim of the study is to investigate the interaction between the cyclical implications of aggregate defaults in an economy and the capital stock of a bank. The approach used requires the construction of a macroeconomic credit model that provides the framework to perform scenario analysis. Within this framework, our study forms the basis of a comparative analysis of two countries, a relatively immune economy from the recent crisis--Australia and the worst effected economy--the USA. The key questions posed in the study are which macroeconomic variables are important for both countries in addition we examine the impact of adverse macroeconomic shocks on default rates in both countries. The results indicate that the same set of macroeconomic variables display different default rates for the two counties. Additionally the study finds that compared to Australia, the US economy is much more susceptible to adverse macroeconomic shocks.
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.
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.
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.:
- Jarrow, Robert A. & Turnbull, Stuart M., 2000. "The intersection of market and credit risk," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 271-299, January.
- Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
- Darren Pain, 2003. "The provisioning experience of the major UK banks: a small panel investigation," Bank of England working papers 177, Bank of England.
- Danielsson, Jon & Shin, Hyun Song & Zigrand, Jean-Pierre, 2004.
"The impact of risk regulation on price dynamics,"
Journal of Banking & Finance,
Elsevier, vol. 28(5), pages 1069-1087, May.
- Martin CIHAK, 2007. "Systemic Loss: A Measure of Financial Stability (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 5-26, March.
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-470, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Hume, Michael & Sentance, Andrew, 2009.
"The global credit boom: Challenges for macroeconomics and policy,"
Journal of International Money and Finance,
Elsevier, vol. 28(8), pages 1426-1461, December.
- Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: challenges for macroeconomics and policy," Discussion Papers 27, Monetary Policy Committee Unit, Bank of England.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- Carol Alexander & Elizabeth Sheedy, 2007. "Model-Based Stress Tests: Linking Stress Tests to VaR for Market Risk," ICMA Centre Discussion Papers in Finance icma-dp2007-02, Henley Business School, Reading University.
- Akhter, Selim & Daly, Kevin, 2009. "Bank health in varying macroeconomic conditions: A panel study," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 285-293, December.
- Charles A. E. Goodhart, 2005. "What Can Academics Contribute to the Study of Financial Stability?," The Economic and Social Review, Economic and Social Studies, vol. 36(3), pages 189-203.
When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:19:y:2010:i:3:p:165-171. 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: (Dana Niculescu)
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.