Work detail

Loan Book Credit Risk Stress Testing . Survey on Practice in the Czech Republic

Author: Mgr. Argayová Šárka
Year: 2011 - summer
Leaders: Mgr. Magda Pečená Ph.D.
Consultants:
Work type: Doctoral
Finance, Financial Markets and Banking
Language: English
Pages: 121
Awards and prizes:
Link:
Abstract: Stress testing is a general term for framework that assesses possible impact of an
adverse shock on the financial health and a capital adequacy of a bank, other financial
institution or the whole financial system. Because credit risk is typically the most
important risk of a bank and many international surveys describe the credit risk stress
testing as one of the least developed, it became the main topic of this thesis.
Credit risk stress testing methods developed in the last years very dynamically
especially thanks to the requirements on stress testing under the Basel II regulatory
framework and a fact that further improvement of these methods is expected to ensure
higher financial stability of institutions and financial sector to adverse shocks and enable to
withstand severe crisis.
The thesis concentrates on the micro level stress tests that are run by each
individual bank. It describes the whole credit risk stress testing procedure, Basel II
regulatory requirements, the importance of this framework for an institution and offers
examples of possible stress testing methods and scenarios.
The first significant contribution to the topic is a survey on practice in the mayor
Czech banks that analyzes whether they are influenced in their credit risk stress testing
framework by their parents or the supervisory institution, whether the stress techniques and
scenarios vary across the Czech banks considerably and whether the scenarios changed in
some way shortly before or during the current crisis.
Possible impact of stress testing program carried out by the Czech National Bank
on the tests run by institutions is further investigated in the last chapter. This second
contributive part contains a model of stress test on a corporate credit portfolio of one
Czech bank. It uses data on PD for different level of segmentation of this portfolio and
scenarios used for the stress test are the most actual forecasts of the Czech National Bank.
Based on the results from this model it is shown that an imprecisely applied
bottom-up approach to stress testing leads to an underestimation of the minimum capital
requirement under stress, which may unfavorably influence perception of risks embedded
in the banks` portfolio as well as severance of scenarios included into stress testing
program.
Downloadable: Rigorous Thesis Argayova

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