Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America
34 Pages Posted: 9 Aug 2017
Date Written: June 2017
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
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