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Macroprudential stress testing of credit risk : a practical approach for policy makers

Author

Listed:
  • Buncic, Daniel
  • Melecky, Martin
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.

Suggested Citation

  • Buncic, Daniel & Melecky, Martin, 2012. "Macroprudential stress testing of credit risk : a practical approach for policy makers," Policy Research Working Paper Series 5936, The World Bank.
    • Handle: RePEc:wbk:wbrwps:5936
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Banks&Banking Reform; Debt Markets; Currencies and Exchange Rates; Economic Theory&Research; Bankruptcy and Resolution of Financial Distress;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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