Research Discussion Papers, Bank of Finland
No 18/2004:
Macro stress testing with a macroeconomic credit risk model for Finland
Kimmo Virolainen ()
Abstract: In the discussion paper, we employ data on
industry-specific corporate sector bankruptcies over the time period from
1986 to 2003 and estimate a macroeconomic credit risk model for the Finnish
corporate sector. The sample period includes a severe recession with
significantly higher-than-average default rates in the early 1990s. The
results suggest a significant relationship between corporate sector default
rates and key macroeconomic factors including GDP, interest rates and
corporate indebtedness. The estimated model is employed to analyse
corporate credit risks conditional on current macroeconomic conditions.
Furthermore, the paper presents some examples of applying the model to
macro stress testing, ie analysing the effects of various adverse
macroeconomic events on the banks’ credit risks stemming from the corporate
sector. The results of the stress tests suggest that Finnish corporate
sector credit risks are fairly limited in the current macroeconomic
environment.
Keywords: banking; credit risk; stress tests; (follow links to similar papers)
JEL-Codes: C15; G21; G28; G33; (follow links to similar papers)
48 pages, July 18, 2004
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