Stress Testing Credit Risk: A Survey of Authorities' Approaches

24 Pages Posted: 4 May 2009

Date Written: December 15, 2008

Abstract

This paper reviews the quantitative methods used at selected central banks to stress testing credit risk, focusing in particular on the methods used to link macroeconomic drivers of stress with bank specific measures of credit risk (macro stress test). Stress testing credit risk is an essential element of the Basel II Framework; because of their financial stability perspective, central banks and supervisors are particularly interested in quantifying the macro-to-micro linkages and have developed a specific modeling expertise in this field. In assessing current macro stress testing practices, the paper highlights the more recent developments and a number of methodological challenges that may be useful for supervisors in their review process of the banks' stress test models as required by the Basel II Framework. It also contributes to the on-going macroprudential research efforts that aim to integrate macroeconomic oversight and prudential supervision, in the direction of early identification of key vulnerabilities and assessment of macro-financial linkages.

Keywords: Macro stress testing, financial stability, macro-prudential analysis, credit risk,probability of default

JEL Classification: E32, E37, G21

Suggested Citation

Foglia, Antonella, Stress Testing Credit Risk: A Survey of Authorities' Approaches (December 15, 2008). Bank of Italy Occasional Paper No. 37, Available at SSRN: https://ssrn.com/abstract=1396243 or http://dx.doi.org/10.2139/ssrn.1396243

Antonella Foglia (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,948
Abstract Views
6,727
rank
9,944
PlumX Metrics