IDEAS home Printed from https://ideas.repec.org/a/jaf/journl/v15y2024i1n768.html

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
    as

    Download full text from publisher

    File URL: https://www.scientific-society.com/AF/article/view/768
    Download Restriction: no
    ---><---

    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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fabian Fink & Yves S. Schüler, 2013. "The Transmission of US Financial Stress: Evidence for Emerging Market Economies," Working Paper Series of the Department of Economics, University of Konstanz 2013-01, Department of Economics, University of Konstanz.
    2. Shayanewako Varaidzo Batsirai & Asrat Tsegaye & Yohane Khamfula, 2019. "The Nexus between Macro-Prudential Banking Regulation, Interest Rate Spread and Monetary Policy in South Africa," Journal of Economics and Behavioral Studies, AMH International, vol. 10(6), pages 141-151.
    3. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
    4. Swain, Pankaj & Misra, Arun Kumar & Kumar, Satish & Madhavan, Vinodh, 2026. "Banking on the brink: An incremental cost-based view of financial stress," Research in International Business and Finance, Elsevier, vol. 81(C).
    5. Afanasyeva, Elena, 2012. "Atypical Behavior of Money and Credit: Evidence From Conditional Forecasts," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65405, Verein für Socialpolitik / German Economic Association.
    6. Jennifer E. Roush, 2001. "Evidence uncovered: long-term interest rates, monetary policy, and the expectations theory," International Finance Discussion Papers 712, Board of Governors of the Federal Reserve System (U.S.).
    7. Max Breitenlechner & Martin Geiger & Mathias Klein, 2024. "The Fiscal Channel of Monetary Policy," Working Papers 2024-07, Faculty of Economics and Statistics, Universität Innsbruck.
    8. Juan F. Rubio-Ramirez & Daniel F. Waggoner & Tao Zha, 2005. "Markov-switching structural vector autoregressions: theory and application," FRB Atlanta Working Paper 2005-27, Federal Reserve Bank of Atlanta.
    9. Margaux MacDonald & Michał Ksawery Popiel, 2020. "Unconventional Monetary Policy in a Small Open Economy," Open Economies Review, Springer, vol. 31(5), pages 1061-1115, November.
    10. Alba Carlos & Cuadra Gabriel & Ibarra Raúl, 2023. "Effects of the Extraordinary Measures Implemented by Banco de México during the COVID-19 Pandemic on Financial Conditions," Working Papers 2023-03, Banco de México.
    11. David Bholat & Rosa Lastra & Sheri Markose & Andrea Miglionico & Kallol Sen, 2016. "Non-performing loans: regulatory and accounting treatments of assets," Bank of England working papers 594, Bank of England.
    12. Annika Camehl & Tomasz Wo'zniak, 2025. "Time-Varying Identification of Structural Vector Autoregressions," Papers 2502.19659, arXiv.org.
    13. Jackson, Laura E. & Owyang, Michael T. & Zubairy, Sarah, 2018. "Debt and stabilization policy: Evidence from a Euro Area FAVAR," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 67-91.
    14. Karlsson, Sune, 2013. "Forecasting with Bayesian Vector Autoregression," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 791-897, Elsevier.
    15. Robin Braun, 2023. "The importance of supply and demand for oil prices: Evidence from non‐Gaussianity," Quantitative Economics, Econometric Society, vol. 14(4), pages 1163-1198, November.
    16. Ms. Grace B Li & Mr. Stephen A. O'Connell & Mr. Christopher S Adam & Mr. Andrew Berg & Mr. Peter J Montiel, 2016. "VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries," IMF Working Papers 2016/090, International Monetary Fund.
    17. S Zhou & D.D Tewari, 2018. "Political Institutions and Macroeconomic Factors as Determinants of Credit Risk in South Africa," Journal of Economics and Behavioral Studies, AMH International, vol. 10(6), pages 211-221.
    18. Christopher A. Sims & Tao Zha, 2004. "MCMC method for Markov mixture simultaneous-equation models: a note," FRB Atlanta Working Paper 2004-15, Federal Reserve Bank of Atlanta.
    19. Francis Neville & Owyang Michael T. & Sekhposyan Tatevik, 2012. "The Local Effects of Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-38, March.
    20. Götz, Thomas B. & Hecq, Alain & Smeekes, Stephan, 2016. "Testing for Granger causality in large mixed-frequency VARs," Journal of Econometrics, Elsevier, vol. 193(2), pages 418-432.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jaf:journl:v:15:y:2024:i:1:n:768. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oussama Quentin Kasseh (email available below). General contact details of provider: https://edirc.repec.org/data/urredtn.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.