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Micro-prudential reverse stress testing as a credit risk management tool

Author

Listed:
  • Wassim GHADHAB

  • Kamel NAOUI

Abstract

Purpose: This article aims to apply the reverse micro-prudential stress test to credit risk at the Bank for Financing Small and Medium Enterprises (BFPME). \n Methodology: It is based on econometric estimations conducted on a quarterly sample of seven (07) variables over the period 2006-2021, incorporating the BSVAR approach of Sims and Zha (1998). \n Results: The estimation results demonstrate that the integration of structural Bayesian approach overcomes the limitations of the classical model. The reverse stress test scenario reveals that the credit portfolio of BFPME is expected to turn into NPLs by the end of 2025. \n Originality of the article: The article introduces an innovative approach by exploring the integration of Bayesian methods into stress tests, as well as the precise determination of reverse stress test scenarios through prior distribution. It emphasizes the importance for banks to adopt this approach to surpass the limitations of the classical models and add a dimension of decision-makers' reflection.

Suggested Citation

  • Wassim GHADHAB & Kamel NAOUI, 2024. "Micro-prudential reverse stress testing as a credit risk management tool," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 15(1), pages 108-122, June.
    • Handle: RePEc:jaf:journl:v:15:y:2024:i:1:n:768
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    References listed on IDEAS

    as
    1. Waggoner, Daniel F. & Zha, Tao, 2003. "A Gibbs sampler for structural vector autoregressions," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 349-366, November.
    2. Jacobs, Michael & Kiefer, Nicholas M., 2010. "The Bayesian Approach to Default Risk: A Guide," Working Papers 10-01, Cornell University, Center for Analytic Economics.
    3. Olena Havrylchyk, 2010. "A macroeconomic credit risk model for stress testing the South African banking sector," Working Papers 3579, South African Reserve Bank.
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    More about this item

    JEL classification:

    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • N8 - Economic History - - Micro-Business History
    • G3 - Financial Economics - - Corporate Finance and Governance

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