Work detail

Can Banks Profit from Business Cycle?

Author: Mgr. Patrik Nový
Year: 2004 - summer
Work type: Economic Theory
Language: English
Pages: 100
Awards and prizes: Young Economist Award
M.A. with distinction from the Dean of the Faculty of Social Sciences for an extraordinarily good masters diploma thesis
Abstract: In addition to portfolio diversification, management experience, gathering information on the borrower and other techniques, financial institutions increasingly rely on credit risk management models to manage credit riskiness of their (loan) portfolios. Modern advanced models apply a so-called portfolio approach. One of these cutting edge portfolio models, McKinsey's econometric CreditPortfolioView, takes into account risk factors which cannot be diversified, i.e. systematic (underlying economic) factors. In this thesis we adopt a similar strategy and apply it to the case of a particular loan portfolio in the Czech Republic. On a simulated portfolio of major Czech companies followed between the years 1995 and 2001 we perform a panel data analysis investigating whether the quality of credit responds to systematic variation. Specifically, we analyze the hypothesis saying the credit quality of the portfolio is linked to the Czech economy's macro development. We find that we can indeed establish statistically significant and clear relationship between the credit quality (measured by Standard & Poor's and computed credit rating) and business cycle measures, such as the GDP gap and unemployment rate. In turn, this finding can be used in a precise determining and a several-percent-saving on the economic capital. Conversely, no influence of, for example, government deficit, external balance or the inflation has been detected. In addition to the main analysis, three more areas are looked into. First, general introduction into the field of credit risk management is provided. Second, aggregated quarterly macro-econometric model to short-term forecast the business cycle for the purposes of the developed credit risk management model is built and estimated on the 1994:1 2003:3 data. And third, credit risk management technique closely related to the main analysis - stress testing is introduced and investigated on a number of Monte Carlo (scenario) exercises.
Downloadable: Diploma Thesis - Nový
August 2018


McKinsey & Company
Moneta Money Bank