Appendix I. Methodology for Corporate Sensitivity Analysis
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Prepared by Julian Chow and Fabian Valencia. The authors thank Dora Iakova, Pascual O’Dogherty, and seminar participants at the Central Bank of Mexico for insightful comments and suggestions and Alexander Herman for outstanding research assistance.
This is estimated from a combination of sources that include Financial Soundness Indicators (FSIs), Bloomberg and Quarterly External Debt Statistics (QEDS). See Appendix 1.
Based a sample from the Orbis database with 123 firms (total assets of 52 percent of GDP and total debts of 28 percent of GDP). The sample was selected based on firms with at least one known value for the financial variables from 2006–2014, and firms with no recent financial data are excluded.
ICR is computed as EBIT divided by interest expense; where EBIT (also known as operating profit) is earnings before interest and taxation.
These countries include China, India, Indonesia, Malaysia, Thailand, Philippines, Brazil, Mexico, Chile, Argentina, Peru, Russia, Turkey, Poland, Hungary, Bulgaria and South Africa.
The Peso has registered a year-over-year depreciation of 25 percent against the U.S. dollar as of September 2015, very close to the exchange rate shock used in the stress test.
The information is sourced from the IMF Corporate Vulnerability Utility database which uses data from Worldscope.
While FX hedging instruments and markets are more developed now than during the late-1990 crises, it is important to note that some of these instruments are complex. For example, some currency hedges would terminate when the exchange rate depreciates beyond a certain “knock-out” threshold, thus rendering the hedge worthless. Moreover, firms are exposed to liquidity and rollover risks when these contracts expire.
These include NPLs from households and the corporate sector.
This includes capital conservation buffer of 2.5 percent.
The increase in NPL’s would affect capital in the same period only to the extent that they exceed loss loan reserves. However, even if loan loss reserves are enough to cover the increase in NPL’s, banks may wish to rebuild buffers.
Hancock and Wilcox (1993, 1994), Bernanke and Lown (1991), Berger and Udell (1994), and Peek and Rosengren (1994), Berrospide and Edge (2010) conducted studies with U.S. data and found coefficients ranging from 0.7 to 2.8, in a variety of specifications.
Estimates vary depending on whether the regressions focus on normal times or periods of financial distress. For instance, Driscoll (2004) finds no statistically significant effects, while Calomiris and Mason (2003) who study the real effects of credit supply shocks around the Great Depression find an elasticity of 0.4.
EBIT (also known as operating profit/loss) is used as a measure of earnings instead of EBITDA (earnings before interest, taxation, depreciation and amortization) to account for the need for investment and replacement of assets.