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Macro stress tests and history-based stressed PD: the case of Hong Kong

Author

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  • Michael Chak-sham Wong
  • Yat-fai Lam

Abstract

Purpose - The purpose of this paper is to discuss issues relating to stress testing methods for credit risks in banks. Also, it suggests a solution to bank supervisors on evaluating stress test results. Design/methodology/approach - Discussion is based on cases analysis on a stress period of the Hong Kong banking sector. Findings - The paper finds that econometric modeling does not work well modeling stress scenarios. The stressed probability of default (PD) provided by Basel II would be much higher than stressed PD observed in the history. Practical implications - Bank supervisors should develop cost-effective methods to monitor the stress test results reported by banks. Originality/value - The paper addresses the issues of stress testing and provides a practical solution for bank supervisors to monitor stress test results reported by banks.

Suggested Citation

  • Michael Chak-sham Wong & Yat-fai Lam, 2008. "Macro stress tests and history-based stressed PD: the case of Hong Kong," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 16(3), pages 251-260, July.
  • Handle: RePEc:eme:jfrcpp:v:16:y:2008:i:3:p:251-260
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    Cited by:

    1. Agata Gemzik-Salwach, 2012. "The Use Of A Value At Risk Measure For The Analysis Of Bank Interest Margins," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 8(4), pages 15-29, February.

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