Macro Stress Testing on Credit Risk of Commercial Banks in China Based on Vector Autoregression Models
39 Pages Posted: 16 Aug 2011
Date Written: March 17, 2011
Abstract
This paper develops a framework for stress-testing the credit risk of Chinese commercial banks to macroeconomic shocks. Using data over the period 1985-2008, this study establishes a vector auto-regression (VAR) model to describe the links between default rate and macroeconomic factors, and then designs three stress scenarios to implement the stress testing by Monte Carlo simulation. As a result, a credit loss distribution is generated. Our results indicate that the shocks in real property and CPI bring long term and worst impact on credit risk to commercial banks in China.
Keywords: Credit risk, Macro stress testing, Commercial bank, VAR model
JEL Classification: G21, G32, E17
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