A Framework for Stress Testing Banks' Credit Risk

The Journal of Risk Model Validation, Vol. 2, No. 1, pp. 3-23, Spring 2008

21 Pages Posted: 15 Jan 2009 Last revised: 4 Mar 2009

See all articles by Jim Wong

Jim Wong

Hong Kong Monetary Authority

Ka-fai Choi

Hong Kong Monetary Authority

Tom Fong

Hong Kong Monetary Authority

Date Written: Spring 2008

Abstract

This study develops a framework for stress testing the credit exposures of Hong Kong's retail banks to macroeconomic shocks. Macro stress testing is performed with the framework to assess the vulnerability of banks' overall loan portfolios and mortgage exposures. A variety of shocks, similar to those occurred during the Asian financial crisis, are individually introduced into the framework for the tests. The results show that even for the Value-at-Risk at the confidence level of 90%, banks would continue to make a profit in most of the stressed scenarios, suggesting that the current credit risk of the banking sector is moderate.

Keywords: Hong Kong banking, credit risk, macroeconomic shocks, seemingly unrelated regression, value-at-risk

JEL Classification: C15, C32, C53, E37, G21

Suggested Citation

Wong, Jim and Choi, Ka-fai and Fong, Tom, A Framework for Stress Testing Banks' Credit Risk (Spring 2008). The Journal of Risk Model Validation, Vol. 2, No. 1, pp. 3-23, Spring 2008, Available at SSRN: https://ssrn.com/abstract=1327561

Jim Wong

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Ka-fai Choi

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Tom Fong (Contact Author)

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre, Central
Hong Kong
Hong Kong