Stress Testing for Financial Institutions
First published:
ISBN: 9781906348113
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Stress Tests for Retail Loan Portfolios
Bernd Engelmann and Evelyn Hayden
Integrating Stress-Testing Frameworks
Stress Tests, Market Risk Measures and Extremes: Bringing Stress Tests to the Forefront of Market Risk Management
Credit Cycle Stress Testing Using a Point-in-Time Rating System
Stress-Testing Credit Value-at-Risk: a Multiyear Approach
Stress Testing the Impact of Group Dependence on Credit Portfolio Risk
Hedge the Stress: Using Stress Tests to Design Hedges for Foreign Currency Loans
Survey of Retail Loan Portfolio Stress Testing
Stress Tests for Retail Loan Portfolios
Stress-Testing Banks’ Credit Risk Using Mixture Vector Autoregressive Models
Uncertainty, Credit Migration, Stressed Scenarios and Portfolio Losses
Worst-Case and Stressed Correlations in the Asymptotic Single Risk Factor Model
Risk Aggregation, Dependence Structure and Diversification Benefit
Stress-Testing Credit Distributions of Banks’ Portfolios: Risk Structure and Concentration Issues
Time-Varying Correlations for Credit Risk: Modelling, Estimating and Stress Testing
Macro Model-Based Stress Testing of Basel II Capital Requirements
Risk Tolerance Concepts and Scenario Analysis of Bank Capital
Basel II-Type Stress Testing of Credit Portfolios
We introduce a simple pricing framework for retail loans, where the value of a loan is determined as the expected value of all future discounted cashflows. This framework is suitable for loans where no market information like bond spreads or credit default swap (CDS) spreads is available for the debtors. One common way to obtain multiyear default probabilities in this framework is the use of a Markov chain, which is calibrated to a one-year transition matrix of a bank’s rating system. Stress tests in this framework are often based on heuristic scenarios like downgrading every debtor by one rating grade and measuring the impact on the portfolio value or the regulatory capital. In this chapter, we show how heuristic scenarios can be replaced by econometric scenarios based on a statistical model of the total loan portfolio’s default rate related to macroeconomic variables. A stress of the macroeconomic variables leads to a stress of the portfolio’s default rate, which is transformed into a stressed transition matrix. This matrix is used to measure the impact of stress on the portfolio.
A loan is probably the most traditional and still the most important banking product. From a bank’s
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