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Forecasting Banks’ Corporate Loan Losses Under Stress: A New Corporate Default Model

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  • Gabriel Bruneau
  • Thibaut Duprey
  • Ruben Hipp

Abstract

We develop a corporate default model to forecast corporate loan losses of the Canadian banking sector under stress. First, we tackle a data gap by reconstructing historical default probabilities for banks’ loan portfolios. Second, we estimate tail elasticities to capture non-linear relationships between macrofinancial conditions and default probabilities. By explicitly modelling default probabilities associated with macroeconomic tail events, this model significantly improves the Bank of Canada’s stress-testing infrastructure.

Suggested Citation

  • Gabriel Bruneau & Thibaut Duprey & Ruben Hipp, 2022. "Forecasting Banks’ Corporate Loan Losses Under Stress: A New Corporate Default Model," Technical Reports 122, Bank of Canada.
    • Handle: RePEc:bca:bocatr:122
    DOI: 10.34989/tr-122
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    References listed on IDEAS

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    1. Mr. Reinout De Bock & Mr. Alexander Demyanets, 2012. "Bank Asset Quality in Emerging Markets: Determinants and Spillovers," IMF Working Papers 2012/071, International Monetary Fund.
    2. Mr. Raphael A Espinoza & Mr. Ananthakrishnan Prasad, 2010. "Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects," IMF Working Papers 2010/224, International Monetary Fund.
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    Cited by:

    1. Tuzcuoglu, Kerem, 2024. "Nonlinear transmission of international financial stress," Economic Modelling, Elsevier, vol. 139(C).

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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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