Macro Stress Testing with a Macroeconomic Credit Risk Model for Finland

Bank of Finland Discussion Paper No. 18/2004

48 Pages Posted: 24 Nov 2004

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

Abstract

In the discussion paper, we employ data on industry-specific corporate sector bankruptcies over the time period from 1986 to 2003 and estimate a macroeconomic credit risk model for the Finnish corporate sector. The sample period includes a severe recession with significantly higher-than average default rates in the early 1990s. The results suggest a significant relationship between corporate sector default rates and key macroeconomic factors including GDP, interest rates and corporate indebtedness. The estimated model is employed to analyse corporate credit risks conditional on current macroeconomic conditions. Furthermore, the paper presents some examples of applying the model to macro stress testing, i.e. analysing the effects of various adverse macroeconomic events on the banks' credit risks stemming from the corporate sector. The results of the stress tests suggest that Finnish corporate sector credit risks are fairly limited in the current macroeconomic environment.

Keywords: Banking, credit risk, stress tests

JEL Classification: C15, G21, G28, G33

Suggested Citation

Virolainen, Kimmo, Macro Stress Testing with a Macroeconomic Credit Risk Model for Finland (October 2004). Bank of Finland Discussion Paper No. 18/2004. Available at SSRN: https://ssrn.com/abstract=622682 or http://dx.doi.org/10.2139/ssrn.622682

Kimmo Virolainen (Contact Author)

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

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