Chapter 31. Portfolio Credit Risk and Macroeconomic Shocks: Applications to Stress Testing under Data-Restricted Environments
Author:
Miguel A. Segoviano
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Language:
English
Print Publication Date:
23 Dec 2014
Keywords:
BOOK; IMF staff; balance sheet; BNP Paribas; credit growth; shortfall exercise; Stress testing; Loans; Credit risk; Nonperforming loans; Commercial banks; Global; Europe; Eastern Europe; Southern Europe; Africa; loan portfolio; portfolio credit risk measurement; CoPoD methodology; short interest; defaults PD; Asset valuation; Macroeconomic risks

Abstract

Portfolio credit risk measurement is greatly affected by data constraints, especially when focusing on loans given to unlisted firms. Standard methodologies adopt convenient but not necessarily properly specified parametric distributions, or they simply ignore the effects of macroeconomic shocks on credit risk. Aiming to improve the measurement of portfolio credit risk, we propose the joint implementation of two new methodologies, namely the Conditional Probability of Default (CoPoD) and the Consistent Information Multivariate Density Optimizing (CIMDO) methodologies. The CoPoD methodology incorporates the effects of macroeconomic shocks into credit risk, recovering robust estimators when only short time series of loans exist. The CIMDO methodology recovers portfolio multivariate densities (on which portfolio credit risk measurement relies) with improved specifications, when only partial information about borrowers is available. Implementation is straightforward and can be very useful in stress testing exercises, as illustrated by that carried out in the International Monetary Fund’s Denmark Financial Sector Assessment Program.

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Contributor Notes

This chapter was previously published as IMF Working Paper No. 06/283 (Segoviano and Padilla, 2006). The authors would like to convey their special thanks to the Danish authorities and Kenneth J. Pedersen of the Danish National Bank for their exemplary cooperation. The authors would also like to thank Professor Charles Goodhart of the Financial Markets Group at the London School of Economics, Kal Wajid, Tonny Lybek, other colleagues at the IMF, and Masazumi Hattori of the Bank of Japan for very helpful comments; Kexue Liu for support on the coding; and Brenda Sylvester and Graham Colin-Jones for excellent editorial assistance.
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Cover A Guide to IMF Stress Testing
A Guide to IMF Stress Testing
Methods and Models
Author:
Ms. Li L Ong
ISBN:
9781484368589
Publication Date:
23 Dec 2014
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781484368589.071
Pages:
612
Front Matter
Chapter 1. Stress Testing at the International Monetary Fund: Methods and Models
Part I: The Accounting-Based Approach
Section A. The Balance Sheet–Based Approach
Chapter 2. Introduction to the Balance Sheet–Based Approach to Stress Testing
Chapter 3. Stress Tester: A Toolkit for Bank-by-Bank Analysis with Accounting Data
Chapter 4. Into the Great Unknown: Stress Testing with Weak Data
Chapter 5. Next-Generation Applied Solvency Stress Testing
Chapter 6. Of Runes and Sagas: Perspectives on Liquidity Stress Testing Using an Iceland Example
Chapter 7. Next-Generation Systemwide Liquidity Stress Testing
Chapter 8. Systemic Bank Risk in Brazil: A Comprehensive Simulation of Correlated Market, Credit, Sovereign, and Interbank Risks
Chapter 9. Modeling Correlated Systemic Bank Liquidity Risks
Chapter 10. Review and Implementation of Credit Risk Models
Chapter 11. Bankers without Borders? Implications of Ring-Fencing for European Cross-Border Banks
Chapter 12. Conducting Stress Tests of Defined Benefit Pension Plans
Section B. The Network Analysis Approach
Part II: The Market Price-Based Approach
Section A. The Equity Indicators–Based Approach
Section B. The Extreme Value Theory Approach
Section C. The Contingent Claims Analysis Approach
Part III: The Macro-Financial Approach
Back Matter