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Modeling Credit Risk through the Austrian Business Cycle: An Update of the OeNB Model

Listed author(s):
  • Michael Boss

    ()

    (Oesterreichische Nationalbank)

  • Martin Fenz

    ()

    (Oesterreichische Nationalbank)

  • Johannes Pann

    ()

    (Oesterreichische Nationalbank)

  • Claus Puhr

    ()

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

  • Martin Schneider

    ()

    (Oesterreichische Nationalbank, Economic Analysis Divison)

  • Eva Ubl

    ()

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

In quantitative financial stability analysis, the link between the macroeconomic environment and credit risk is of particular importance when assessing the risk hidden in loan portfolios. Macroeconomic stress testing, in particular, which aims at measuring the impact of an economic crisis on individual banks or on the entire financial system, depends on means to quantitatively assess this link. Hence, the objective of this paper is to provide a methodological update of the OeNB’s previous credit risk model that improves the capture of the relation between macroeconomic variables and probabilities of default for the main Austrian corporate sectors. In addition to the standard model based on individual macroeconomic variables, the paper explores solutions to two important challenges: first, the challenge related to the exploitation of potential information inherent in a larger macroeconomic data set and second, the problem that accounts for potential nonlinearity in the relation between credit and business cycles. The first issue is addressed via a regression model based on a principal components analysis that takes in a wider range of macroeconomic variables than commonly practiced. The second issue is addressed via a threshold approach. This paper presents the estimation results for the three different models and discusses them on the basis of an illustrative example.

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File URL: https://www.oenb.at/dam/jcr:543a8778-2161-4006-986d-87df0b436e2c/fsr_17_special_topics03_tcm16-140533.pdf
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Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Financial Stability Report.

Volume (Year): (2009)
Issue (Month): 17 ()
Pages: 85-101

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Handle: RePEc:onb:oenbfs:y:2009:i:17:b:3
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  1. Ralph de Haas & Ilko Naaborg, 2005. "Internal Capital Markets in Multinational Banks: Implications for European Transition Countries," DNB Working Papers 051, Netherlands Central Bank, Research Department.
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  11. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
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  14. Berger, Allen N. & Buch, Claudia M. & DeLong, Gayle & DeYoung, Robert, 2004. "Exporting financial institutions management via foreign direct investment mergers and acquisitions," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 333-366, April.
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