Stress Testing the Corporate Loans Portfolio of the Canadian Banking Sector

Bank of Canada Working Paper No. 2006-47

46 Pages Posted: 6 Dec 2012

See all articles by Miroslav Misina

Miroslav Misina

Bank of Canada; BMO Capital Markets

David Tessier

Government of Canada - Bank of Canada

Shubhasis Dey

Indian Institute of Management, Kozhikode, India

Date Written: 2006

Abstract

Stress testing, at its most general level, is an investigation of the performance of an entity under abnormal operating conditions. The authors focus on one set of entities — the Canadian banking sector — and investigate losses in the loans portfolio of this sector as a function of changing circumstances in the different industries in which these loans reside. These circumstances are characterized by means of one summary measure — sectoral probabilities of default — and this measure is modelled as a function of macroeconomic variables. Using this model, the authors assess the interrelationship between the macroeconomic environment and sectoral defaults, and perform a series of stress tests under different scenarios that are thought to be most pertinent to Canada. The tools underlying the authors’ analysis are general and can be applied to other countries, as well as to other macroeconomic scenarios.

Keywords: stress testing, financial stability, credit risk

JEL Classification: C15, G21, G33

Suggested Citation

Misina, Miroslav and Tessier, David and Dey, Shubhasis, Stress Testing the Corporate Loans Portfolio of the Canadian Banking Sector (2006). Bank of Canada Working Paper No. 2006-47, Available at SSRN: https://ssrn.com/abstract=2185676 or http://dx.doi.org/10.2139/ssrn.2185676

Miroslav Misina (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

BMO Capital Markets

Canada

David Tessier

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Shubhasis Dey

Indian Institute of Management, Kozhikode, India ( email )

Kerala
Kozhikode, Kerala 673570
India

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