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Stress testing credit risk: a survey of authorities' approaches

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  • Antonella Foglia

    () (Banca d'Italia)

Abstract

This paper reviews the quantitative methods used at selected central banks to stress testing credit risk, focusing in particular on the methods used to link macroeconomic drivers of stress with bank specific measures of credit risk (macro stress test). Stress testing credit risk is an essential element of the Basel II Framework; because of their financial stability perspective, central banks and supervisors are particularly interested in quantifying the macro-to-micro linkages and have developed a specific modeling expertise in this field. In assessing current macro stress testing practices, the paper highlights the more recent developments and a number of methodological challenges that may be useful for supervisors in their review process of the banks' stress test models as required by the Basel II Framework. It also contributes to the on-going macroprudential research efforts that aim to integrate macroeconomic oversight and prudential supervision, in the direction of early identification of key vulnerabilities and assessment of macro-financial linkages.

Suggested Citation

  • Antonella Foglia, 2008. "Stress testing credit risk: a survey of authorities' approaches," Questioni di Economia e Finanza (Occasional Papers) 37, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_37_08
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    File URL: http://www.bancaditalia.it/pubblicazioni/qef/2008-0037/QEF_37.pdf
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    References listed on IDEAS

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    5. Matthew Brzozowski, 2007. "Welfare Reforms and Consumption among Single Mother Households: Evidence from Canadian Provinces," Canadian Public Policy, University of Toronto Press, vol. 33(2), pages 227-250, June.
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    Cited by:

    1. Schuermann, Til, 2014. "Stress testing banks," International Journal of Forecasting, Elsevier, vol. 30(3), pages 717-728.
    2. FARAYIBI, Adesoji, 2016. "Stress Testing in the Nigerian Banking Sector," MPRA Paper 73615, University Library of Munich, Germany.
    3. Eftychia Nikolaidou & Sofoklis Vogiazas, 2014. "Credit Risk Determinants for the Bulgarian Banking System," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(1), pages 87-102, February.
    4. Varotto, Simone, 2012. "Stress testing credit risk: The Great Depression scenario," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3133-3149.

    More about this item

    Keywords

    Macro stress testing; financial stability; macro-prudential analysis; credit risk; probability of default;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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