Stress Testing Across International Exposures and Activities
Robert Scavotto and Robert Skinkle
Preface: Two economists’ views on the bank-sovereign linkage
Introduction
Assessing Country Risk: A Practical Guide
Sovereign Risk: Characteristics, History and a Review of Recent Research
The Arab Spring: Insights for Political Risk Analysis
The Eurozone Crisis: The Forgotten Risks of Private and External Debt
How the Eurozone Crisis Became a Banking Crisis, and the Risk of Japanisation
The Changing Dynamics of Country Risk
Capital Flight as a Political Risk Indicator
Debt Crisis Indicators of Emerging Markets versus Eurozone Economies
How Much Economic Capital Could European Banks Save? The Case for Optimal Sovereign Risk Allocation
Fixing Fundamental Flaws in Probabilistic Country Risk Models
Have We Learned the Country Risk Management Lessons of the 1997 Asian Financial Crisis?
Using Systems Thinking to Enhance Country Risk Assessment
Approaches to the Quantification of Country Risk
Stress Testing Across International Exposures and Activities
Stress testing foreign exposures of internationally active financial institutions presents an array of challenges, from developing datasets to understanding and factoring in qualitative factors, which may drive loss rates. These factors can be a function of the government or, more simply, be related to developments in lending practices within a given market. Our work to stress test consumer loan portfolios across a group of countries led us to conclude that a stress-test approach for consumer portfolios in Asia is best pursued on an individual country basis with a stratification of the consumer portfolio by secured and unsecured credits. This chapter describes our work in this area and uses the Korean consumer market as a case study.
CONDUCTING STRESS TESTS OF INTERNATIONAL ACTIVITIES IN AN IDIOSYNCRATIC WORLD
Financial institutions with international business activities, including operations in foreign markets, have a number of questions to consider in designing stress tests that cover these activities, exposures and risks. The first and most important is deciding on the purpose of the stress test, since international risks can overlay a number of different risk types, such
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