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Stress Tests for Banking Sector: A Technical Note

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  • Rodrigo Alfaro
  • Andrés Sagner

Abstract

Credit and market risks are crucial for financial institutions. In this paper we present the model used by the Central Bank of Chile to conduct the stress tests for commercial banks in Chile. Market risk uses a balance-sheet approach that is consistent with the credit risk. For exchange rate risk we consider a change in the value of the portfolio under an unexpected change in the exchange rate by X%, meanwhile the interest rate risk is computed using a model for the whole yield curve. In particular, the modeling of this risk follows Nelson and Siegel (1987). Credit risk is computed using a non-linear VAR that relates banking system aggregates (loan loss provisions, credit growth, and write-offs) with macroeconomics variables (output growth, short and long term interest rates, terms of trade, and unemployment). For each Financial Stability Report (FSR) the model is calibrated using data from 1997 to the most recent date at monthly frequency. The effect on individual banks is computed adjusting the loan loss provision and total loans of each bank with the forecast value for the system. Given that forecasts are separated by type of loans (commercial, mortgage, and consumer) then the final effect on a particular bank depend on its initial composition.

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  • Rodrigo Alfaro & Andrés Sagner, 2011. "Stress Tests for Banking Sector: A Technical Note," Working Papers Central Bank of Chile 610, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:610
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_610.pdf
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    Cited by:

    1. Juan-Francisco Martínez & Rodrigo Cifuentes & Juan Sebastián Becerra, 2017. "Pruebas de Tensión Bancaria del Banco Central de Chile: Actualización," Working Papers Central Bank of Chile 801, Central Bank of Chile.
    2. Francisco Arroyo Marioli & Juan Sebastián Becerra & Matías Solorza, 2021. "The Credit Channel Through the Lens of a Semi- Structural Model," Working Papers Central Bank of Chile 911, Central Bank of Chile.
    3. Arroyo Marioli, Francisco & Becerra, Juan Sebastián & Solorza, Matías, 2022. "The credit channel in chile through the lens of a semi-structural model," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(2).
    4. Michael Pedersen, 2017. "Revisiting the price puzzle in Chile," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 20(1), pages 072-079, April.

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