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
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: Suggested Citation
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