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Stress testing credit risk: a survey of authorities' approaches

by Antonella Foglia, Banca d’Italia, Banking and Financial Supervision

This paper reviews the quantitative methods developed at selected authorities for stress testing credit risk, focusing in particular on the methods used to link macroeconomic drivers of stress with bank-specific measures of credit risk (macro stress test). Authorities with a mandate for financial stability are particularly interested in quantifying the macro-to-micro linkages and have developed specific modeling expertise in this field. Stress testing credit risk is also an essential element of the Basel II Framework. The paper highlights recent developments in macro stress testing and details a number of methodological challenges that may be useful for supervisors in their review process of banks’ models as required by Basel II. It also contributes to the on-going macroprudential research efforts to integrate macroeconomic oversight and prudential supervision, for early detection of key vulnerabilities and assessment of macro-financial linkages.


http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/qf_37...

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Tags: B2P2, Basel II, Financial Predictive Analytics, Stress Testing

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