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Stress testing credit risk portfolios




In this study we survey practices and supervisory expectations for stress testing (ST) in a credit risk framework for banking book exposures. We introduce and motivate ST; and discuss the function, supervisory requirements and expectations, credit risk parameters, interpretation results with respect to ST. This includes a typology of ST (uniform testing, risk factor sensitivities, scenario analysis; and historical, statistical and hypothetical scenarios), and procedures for conducting ST. We conclude with a simple and practical stress testing example using a ratings migration based approach.

Suggested Citation

  • Jacobs Jr, Michael, 2013. "Stress testing credit risk portfolios," Journal of Financial Transformation, Capco Institute, vol. 37, pages 53-76.
  • Handle: RePEc:ris:jofitr:1556

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    References listed on IDEAS

    1. Bervas, A., 2006. "Market liquidity and its incorporation into risk management," Financial Stability Review, Banque de France, issue 8, pages 63-79, May.
    2. Anil Bangia & Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Modeling Liquidity Risk With Implications for Traditional Market Risk Measurement and Management," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-062, New York University, Leonard N. Stern School of Business-.
    3. Umut Çetin & Robert A. Jarrow & Philip Protter, 2008. "Liquidity risk and arbitrage pricing theory," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 8, pages 153-183 World Scientific Publishing Co. Pte. Ltd..
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    More about this item


    stress testing; credit risk; credit risk portfolio; credit risk framework; banking book exposure;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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