Macroprudential Stress Testing of Credit Risk : A Practical Approach for Policy Makers

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)...

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Bibliographic Details
Main Authors: Buncic, Daniel, Melecky, Martin
Format: Policy Research Working Paper
Language:English
Published: 2012
Subjects:
NPL
Online Access:http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20120105144231
http://hdl.handle.net/10986/3221
id okr-10986-3221
recordtype oai_dc
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
topic ACCOUNTING
ASSET CLASS
ASSET CLASSES
BALANCE SHEET
BANK BORROWERS
BANK CREDIT
BANK FOR INTERNATIONAL SETTLEMENTS
BANK LENDING
BANK PROFITS
BANKING CRISES
BANKING SECTOR
BANKING SYSTEM
BANKING SYSTEMS
BANKS
BENCHMARK
BOND
BUFFER
BUFFERS
BUSINESS CYCLE
BUSINESS CYCLES
CAPITAL ADEQUACY
CAPITAL REQUIREMENT
CAPITAL REQUIREMENTS
CASH FLOW
CENTRAL BANK
CLASSIFIED LOANS
COLLATERAL
CONSENSUS FORECASTS
CONSUMER LOANS
CONSUMERS
CONTROL VARIABLES
CORRECTIVE ACTION
CREDIT BOOM
CREDIT BOOMS
CREDIT CARD
CREDIT CARDS
CREDIT CONTRACTS
CREDIT EXPOSURES
CREDIT GROWTH
CREDIT LINES
CREDIT PROVISION
CREDIT RISK
CREDIT RISK EXPOSURES
CREDIT RISKS
CREDITS
CURRENCY APPRECIATION
CURRENCY CRISES
CURRENCY CRISIS
CURRENCY DEPRECIATION
CURRENCY VALUE
DEBT
DEBT HOLDER
DECISION MAKING
DEFAULT SITUATIONS
DEFAULTS
DEPENDENT
DEPENDENT VARIABLE
DEPRECIATIONS
DERIVATIVES
DEVELOPING COUNTRIES
DEVELOPMENT POLICY
DIVIDENDS
DOLLAR EXCHANGE RATE
DOMESTIC CURRENCY
DUMMY VARIABLES
ECONOMETRIC MODEL
ECONOMIC GROWTH
ECONOMIC RISK
EFFECT OF EXCHANGE RATE CHANGES
ELASTICITY
EMERGING ECONOMIES
EMERGING MARKET
EMERGING MARKET ECONOMIES
EMPLOYMENT
EQUILIBRIUM MODELS
EXCHANGE RATE
EXCHANGE RATE MOVEMENTS
EXTERNAL COMPETITIVENESS
FINANCIAL CRISES
FINANCIAL CRISIS
FINANCIAL DEEPENING
FINANCIAL DISTRESS
FINANCIAL REGULATION
FINANCIAL SECTOR
FINANCIAL STRESSES
FINANCIAL SYSTEM
FINANCIAL SYSTEMS
FOREIGN BANKS
FOREIGN CURRENCY
FOREIGN CURRENCY DEBT
FOREIGN CURRENCY EXPOSURES
FOREIGN CURRENCY LENDING
FUTURE FINANCIAL CRISES
FUTURE RESEARCH
FUTURE VALUE
GDP PER CAPITA
GENERAL EQUILIBRIUM
GENERAL EQUILIBRIUM MODELS
GROWTH RATES
HOLDING
INCOME
INCOME EFFECT
INCOME INEQUALITY
INDIVIDUAL ASSET
INDIVIDUAL BANK
INDIVIDUAL BANKS
INFLATION
INFORMATION DISCLOSURE
INSOLVENCY
INSOLVENCY THRESHOLD
INSTRUMENT
INTEREST PARITY
INTERNATIONAL BANK
INTERNATIONAL BANKS
JUDGMENT
LENDING PRACTICES
LETTERS OF CREDIT
LIQUIDITY
LIQUIDITY RISK
LOAN
LOAN COMMITMENTS
LOAN CONCENTRATION
LOAN LOSS
LOAN LOSS PROVISIONS
LOAN MATURITY
LOANS TO CREDIT INSTITUTIONS
LOCAL CURRENCY
LONG-RUN EQUILIBRIUM
MACROECONOMIC CONDITIONS
MACROECONOMIC DATA
MACROECONOMIC MODEL
MACROECONOMIC MODELS
MACROECONOMIC RISKS
MACROECONOMIC SHOCKS
MACROECONOMIC VARIABLE
MACROECONOMIC VARIABLES
MATURITY MISMATCHES
MATURITY TRANSFORMATION
MATURITY TRANSFORMATIONS
MIDDLE INCOME COUNTRIES
MONETARY FUND
MORTGAGE
MORTGAGE LOANS
MULTIPLIERS
NET EXPORTS
NET LOSS
NET LOSSES
NOMINAL EXCHANGE RATE
NON-PERFORMING LOANS
NONPERFORMING LOANS
NPL
OPEN ECONOMY
OUTPUT LOSS
OVERDUE LOANS
PARTICULAR ASSET
PENALTY
POLICY RESPONSE
PORTFOLIO
PORTFOLIOS
POTENTIAL EXPOSURE
PROBABILITY OF DEFAULT
PROBLEM BANKS
PUBLIC AGENCIES
REAL GDP
REAL INTEREST
REAL INTEREST RATE
REGIONAL BANKS
REGRESSION ANALYSIS
REPAYMENT
REPAYMENT CAPACITY
RESERVES
RETURN
RETURN ON ASSETS
RISK FACTORS
RISK PROFILES
RISK WEIGHTED ASSETS
SECURITIES
SERIAL CORRELATION
SHAREHOLDERS
SIMULATION TECHNIQUES
SOLVENCY
SOLVENCY PROBLEMS
STEADY STATE
SUBSIDIARIES
SYSTEMIC RISK
TIER 1 CAPITAL
TRANSITION ECONOMIES
TROUGH
UNCERTAINTY
VARIANCE-COVARIANCE MATRIX
WEIGHTS
ZERO WEIGHT
spellingShingle ACCOUNTING
ASSET CLASS
ASSET CLASSES
BALANCE SHEET
BANK BORROWERS
BANK CREDIT
BANK FOR INTERNATIONAL SETTLEMENTS
BANK LENDING
BANK PROFITS
BANKING CRISES
BANKING SECTOR
BANKING SYSTEM
BANKING SYSTEMS
BANKS
BENCHMARK
BOND
BUFFER
BUFFERS
BUSINESS CYCLE
BUSINESS CYCLES
CAPITAL ADEQUACY
CAPITAL REQUIREMENT
CAPITAL REQUIREMENTS
CASH FLOW
CENTRAL BANK
CLASSIFIED LOANS
COLLATERAL
CONSENSUS FORECASTS
CONSUMER LOANS
CONSUMERS
CONTROL VARIABLES
CORRECTIVE ACTION
CREDIT BOOM
CREDIT BOOMS
CREDIT CARD
CREDIT CARDS
CREDIT CONTRACTS
CREDIT EXPOSURES
CREDIT GROWTH
CREDIT LINES
CREDIT PROVISION
CREDIT RISK
CREDIT RISK EXPOSURES
CREDIT RISKS
CREDITS
CURRENCY APPRECIATION
CURRENCY CRISES
CURRENCY CRISIS
CURRENCY DEPRECIATION
CURRENCY VALUE
DEBT
DEBT HOLDER
DECISION MAKING
DEFAULT SITUATIONS
DEFAULTS
DEPENDENT
DEPENDENT VARIABLE
DEPRECIATIONS
DERIVATIVES
DEVELOPING COUNTRIES
DEVELOPMENT POLICY
DIVIDENDS
DOLLAR EXCHANGE RATE
DOMESTIC CURRENCY
DUMMY VARIABLES
ECONOMETRIC MODEL
ECONOMIC GROWTH
ECONOMIC RISK
EFFECT OF EXCHANGE RATE CHANGES
ELASTICITY
EMERGING ECONOMIES
EMERGING MARKET
EMERGING MARKET ECONOMIES
EMPLOYMENT
EQUILIBRIUM MODELS
EXCHANGE RATE
EXCHANGE RATE MOVEMENTS
EXTERNAL COMPETITIVENESS
FINANCIAL CRISES
FINANCIAL CRISIS
FINANCIAL DEEPENING
FINANCIAL DISTRESS
FINANCIAL REGULATION
FINANCIAL SECTOR
FINANCIAL STRESSES
FINANCIAL SYSTEM
FINANCIAL SYSTEMS
FOREIGN BANKS
FOREIGN CURRENCY
FOREIGN CURRENCY DEBT
FOREIGN CURRENCY EXPOSURES
FOREIGN CURRENCY LENDING
FUTURE FINANCIAL CRISES
FUTURE RESEARCH
FUTURE VALUE
GDP PER CAPITA
GENERAL EQUILIBRIUM
GENERAL EQUILIBRIUM MODELS
GROWTH RATES
HOLDING
INCOME
INCOME EFFECT
INCOME INEQUALITY
INDIVIDUAL ASSET
INDIVIDUAL BANK
INDIVIDUAL BANKS
INFLATION
INFORMATION DISCLOSURE
INSOLVENCY
INSOLVENCY THRESHOLD
INSTRUMENT
INTEREST PARITY
INTERNATIONAL BANK
INTERNATIONAL BANKS
JUDGMENT
LENDING PRACTICES
LETTERS OF CREDIT
LIQUIDITY
LIQUIDITY RISK
LOAN
LOAN COMMITMENTS
LOAN CONCENTRATION
LOAN LOSS
LOAN LOSS PROVISIONS
LOAN MATURITY
LOANS TO CREDIT INSTITUTIONS
LOCAL CURRENCY
LONG-RUN EQUILIBRIUM
MACROECONOMIC CONDITIONS
MACROECONOMIC DATA
MACROECONOMIC MODEL
MACROECONOMIC MODELS
MACROECONOMIC RISKS
MACROECONOMIC SHOCKS
MACROECONOMIC VARIABLE
MACROECONOMIC VARIABLES
MATURITY MISMATCHES
MATURITY TRANSFORMATION
MATURITY TRANSFORMATIONS
MIDDLE INCOME COUNTRIES
MONETARY FUND
MORTGAGE
MORTGAGE LOANS
MULTIPLIERS
NET EXPORTS
NET LOSS
NET LOSSES
NOMINAL EXCHANGE RATE
NON-PERFORMING LOANS
NONPERFORMING LOANS
NPL
OPEN ECONOMY
OUTPUT LOSS
OVERDUE LOANS
PARTICULAR ASSET
PENALTY
POLICY RESPONSE
PORTFOLIO
PORTFOLIOS
POTENTIAL EXPOSURE
PROBABILITY OF DEFAULT
PROBLEM BANKS
PUBLIC AGENCIES
REAL GDP
REAL INTEREST
REAL INTEREST RATE
REGIONAL BANKS
REGRESSION ANALYSIS
REPAYMENT
REPAYMENT CAPACITY
RESERVES
RETURN
RETURN ON ASSETS
RISK FACTORS
RISK PROFILES
RISK WEIGHTED ASSETS
SECURITIES
SERIAL CORRELATION
SHAREHOLDERS
SIMULATION TECHNIQUES
SOLVENCY
SOLVENCY PROBLEMS
STEADY STATE
SUBSIDIARIES
SYSTEMIC RISK
TIER 1 CAPITAL
TRANSITION ECONOMIES
TROUGH
UNCERTAINTY
VARIANCE-COVARIANCE MATRIX
WEIGHTS
ZERO WEIGHT
Buncic, Daniel
Melecky, Martin
Macroprudential Stress Testing of Credit Risk : A Practical Approach for Policy Makers
geographic_facet Europe and Central Asia
Europe and Central Asia
relation Policy Research working paper ; no. WPS 5936
description 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.
format Publications & Research :: Policy Research Working Paper
author Buncic, Daniel
Melecky, Martin
author_facet Buncic, Daniel
Melecky, Martin
author_sort Buncic, Daniel
title Macroprudential Stress Testing of Credit Risk : A Practical Approach for Policy Makers
title_short Macroprudential Stress Testing of Credit Risk : A Practical Approach for Policy Makers
title_full Macroprudential Stress Testing of Credit Risk : A Practical Approach for Policy Makers
title_fullStr Macroprudential Stress Testing of Credit Risk : A Practical Approach for Policy Makers
title_full_unstemmed Macroprudential Stress Testing of Credit Risk : A Practical Approach for Policy Makers
title_sort macroprudential stress testing of credit risk : a practical approach for policy makers
publishDate 2012
url http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20120105144231
http://hdl.handle.net/10986/3221
_version_ 1764386627906437120
spelling okr-10986-32212021-04-23T14:02:08Z Macroprudential Stress Testing of Credit Risk : A Practical Approach for Policy Makers Buncic, Daniel Melecky, Martin ACCOUNTING ASSET CLASS ASSET CLASSES BALANCE SHEET BANK BORROWERS BANK CREDIT BANK FOR INTERNATIONAL SETTLEMENTS BANK LENDING BANK PROFITS BANKING CRISES BANKING SECTOR BANKING SYSTEM BANKING SYSTEMS BANKS BENCHMARK BOND BUFFER BUFFERS BUSINESS CYCLE BUSINESS CYCLES CAPITAL ADEQUACY CAPITAL REQUIREMENT CAPITAL REQUIREMENTS CASH FLOW CENTRAL BANK CLASSIFIED LOANS COLLATERAL CONSENSUS FORECASTS CONSUMER LOANS CONSUMERS CONTROL VARIABLES CORRECTIVE ACTION CREDIT BOOM CREDIT BOOMS CREDIT CARD CREDIT CARDS CREDIT CONTRACTS CREDIT EXPOSURES CREDIT GROWTH CREDIT LINES CREDIT PROVISION CREDIT RISK CREDIT RISK EXPOSURES CREDIT RISKS CREDITS CURRENCY APPRECIATION CURRENCY CRISES CURRENCY CRISIS CURRENCY DEPRECIATION CURRENCY VALUE DEBT DEBT HOLDER DECISION MAKING DEFAULT SITUATIONS DEFAULTS DEPENDENT DEPENDENT VARIABLE DEPRECIATIONS DERIVATIVES DEVELOPING COUNTRIES DEVELOPMENT POLICY DIVIDENDS DOLLAR EXCHANGE RATE DOMESTIC CURRENCY DUMMY VARIABLES ECONOMETRIC MODEL ECONOMIC GROWTH ECONOMIC RISK EFFECT OF EXCHANGE RATE CHANGES ELASTICITY EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMPLOYMENT EQUILIBRIUM MODELS EXCHANGE RATE EXCHANGE RATE MOVEMENTS EXTERNAL COMPETITIVENESS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEEPENING FINANCIAL DISTRESS FINANCIAL REGULATION FINANCIAL SECTOR FINANCIAL STRESSES FINANCIAL SYSTEM FINANCIAL SYSTEMS FOREIGN BANKS FOREIGN CURRENCY FOREIGN CURRENCY DEBT FOREIGN CURRENCY EXPOSURES FOREIGN CURRENCY LENDING FUTURE FINANCIAL CRISES FUTURE RESEARCH FUTURE VALUE GDP PER CAPITA GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM MODELS GROWTH RATES HOLDING INCOME INCOME EFFECT INCOME INEQUALITY INDIVIDUAL ASSET INDIVIDUAL BANK INDIVIDUAL BANKS INFLATION INFORMATION DISCLOSURE INSOLVENCY INSOLVENCY THRESHOLD INSTRUMENT INTEREST PARITY INTERNATIONAL BANK INTERNATIONAL BANKS JUDGMENT LENDING PRACTICES LETTERS OF CREDIT LIQUIDITY LIQUIDITY RISK LOAN LOAN COMMITMENTS LOAN CONCENTRATION LOAN LOSS LOAN LOSS PROVISIONS LOAN MATURITY LOANS TO CREDIT INSTITUTIONS LOCAL CURRENCY LONG-RUN EQUILIBRIUM MACROECONOMIC CONDITIONS MACROECONOMIC DATA MACROECONOMIC MODEL MACROECONOMIC MODELS MACROECONOMIC RISKS MACROECONOMIC SHOCKS MACROECONOMIC VARIABLE MACROECONOMIC VARIABLES MATURITY MISMATCHES MATURITY TRANSFORMATION MATURITY TRANSFORMATIONS MIDDLE INCOME COUNTRIES MONETARY FUND MORTGAGE MORTGAGE LOANS MULTIPLIERS NET EXPORTS NET LOSS NET LOSSES NOMINAL EXCHANGE RATE NON-PERFORMING LOANS NONPERFORMING LOANS NPL OPEN ECONOMY OUTPUT LOSS OVERDUE LOANS PARTICULAR ASSET PENALTY POLICY RESPONSE PORTFOLIO PORTFOLIOS POTENTIAL EXPOSURE PROBABILITY OF DEFAULT PROBLEM BANKS PUBLIC AGENCIES REAL GDP REAL INTEREST REAL INTEREST RATE REGIONAL BANKS REGRESSION ANALYSIS REPAYMENT REPAYMENT CAPACITY RESERVES RETURN RETURN ON ASSETS RISK FACTORS RISK PROFILES RISK WEIGHTED ASSETS SECURITIES SERIAL CORRELATION SHAREHOLDERS SIMULATION TECHNIQUES SOLVENCY SOLVENCY PROBLEMS STEADY STATE SUBSIDIARIES SYSTEMIC RISK TIER 1 CAPITAL TRANSITION ECONOMIES TROUGH UNCERTAINTY VARIANCE-COVARIANCE MATRIX WEIGHTS ZERO WEIGHT 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. 2012-03-19T17:28:30Z 2012-03-19T17:28:30Z 2012-01-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20120105144231 http://hdl.handle.net/10986/3221 English Policy Research working paper ; no. WPS 5936 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper Europe and Central Asia Europe and Central Asia