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Macro stress testing with a macroeconomic credit risk model for Finland

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  • Virolainen, Kimmo

Abstract

In the discussion paper, we employ data on industry-specific corporate sector bankruptcies over the time period from 1986 to 2003 and estimate a macroeconomic credit risk model for the Finnish corporate sector.The sample period includes a severe recession with significantly higher-than-average default rates in the early 1990s.The results suggest a significant relationship between corporate sector default rates and key macroeconomic factors including GDP, interest rates and corporate indebtedness.The estimated model is employed to analyse corporate credit risks conditional on current macroeconomic conditions.Furthermore, the paper presents some examples of applying the model to macro stress testing, ie analysing the effects of various adverse macroeconomic events on the banks credit risks stemming from the corporate sector.The results of the stress tests suggest that Finnish corporate sector credit risks are fairly limited in the current macroeconomic environment.

Suggested Citation

  • Virolainen, Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Bank of Finland Research Discussion Papers 18/2004, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2004_018
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    References listed on IDEAS

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    2. Pesaran, M. Hashem & Schuermann, Til & Treutler, Bjorn-Jakob & Weiner, Scott M., 2006. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1211-1261, August.
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    Cited by:

    1. Kyriakos Georgiou & Athanasios N. Yannacopoulos, 2023. "Probability of Default modelling with L\'evy-driven Ornstein-Uhlenbeck processes and applications in credit risk under the IFRS 9," Papers 2309.12384, arXiv.org.
    2. Anilda Bozdo & Ermela Kripa, 2015. "The Impact of Macro-Economic Factors on Non-Performing Loans in Albania," Academic Journal of Interdisciplinary Studies, Richtmann Publishing Ltd, vol. 4, December.
    3. Natalia Nehrebecka, 2023. "Distribution of credit-risk concentration in particular sectors of the economy, and economic capital before and during the COVID-19 pandemic," Economic Change and Restructuring, Springer, vol. 56(1), pages 129-158, February.
    4. Jokivuolle, Esa & Virolainen, Kimmo & Vähämaa, Oskari, 2008. "Macro-model-based stress testing of Basel II requirements," Bank of Finland Research Discussion Papers 17/2008, Bank of Finland.
    5. Csaba BÁLINT, 2022. "Sectorial Price Shock Propagation via Input-Output Linkages," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 21-40, December.

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    More about this item

    Keywords

    banking; credit risk; stress tests;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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