Macroprudential Stress Testing of Credit Risk: A Practical Approach for Policy Makers

73 Pages Posted: 20 Apr 2016

See all articles by Daniel Buncic

Daniel Buncic

Stockholm University - Stockholm Business School

Martin Melecky

World Bank

Date Written: January 1, 2012

Abstract

Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materializing credit risk. The authors apply the proposed approach to a set of Eastern European banks and discuss the results.

Keywords: Banks & Banking Reform, Debt Markets, Currencies and Exchange Rates, Economic Theory & Research, Bankruptcy and Resolution of Financial Distress

Suggested Citation

Buncic, Daniel and Melecky, Martin, Macroprudential Stress Testing of Credit Risk: A Practical Approach for Policy Makers (January 1, 2012). World Bank Policy Research Working Paper No. 5936, Available at SSRN: https://ssrn.com/abstract=1980589

Daniel Buncic

Stockholm University - Stockholm Business School

Sweden

Martin Melecky

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
398
Abstract Views
930
rank
83,269
PlumX Metrics