Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America

34 Pages Posted: 9 Aug 2017

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department

Cheng Hoon Lim

International Monetary Fund (IMF)

Jose Daniel Rodriguez-Delgado

IMF Institute

Bennett Sutton

International Monetary Fund (IMF)

Melesse Minale Tashu

International Monetary Fund (IMF)

Date Written: June 2017

Abstract

This paper suggests a novel approach to assess corporate sector solvency risk. The approach uses a Bottom-Up Default Analysis that projects probabilities of default of individual firms conditional on macroeconomic conditions and financial risk factors. This allows a direct macro-financial link to assessing corporate performance and facilitates what-if scenarios. When extended with credit portfolio techniques, the approach can also assess the aggregate impact of changes in firm solvency risk on creditor banks' capital buffers under different macroeconomic scenarios. As an illustration, we apply this approach to the corporate sector of the five largest economies in Latin America.

Keywords: Bank capital, Corporate sector, Macro-financial, default risk, forward intensity models, economic scenarios, simulation, General

JEL Classification: F40, G21, G31, F4

Suggested Citation

Chan-Lau, Jorge Antonio and Lim, Cheng Hoon and Rodriguez-Delgado, Jose Daniel and Sutton, Bennett and Tashu, Melesse Minale, Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America (June 2017). IMF Working Paper No. 17/133, Available at SSRN: https://ssrn.com/abstract=3014044

Jorge Antonio Chan-Lau (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Cheng Hoon Lim

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jose Daniel Rodriguez-Delgado

IMF Institute ( email )

700 19 th Street NW
Washington, DC 20431
United States

Bennett Sutton

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Melesse Minale Tashu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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