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Estimation of Regulatory Credit Risk Models

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  • Carlos Perez Montes

Abstract

This article estimates a general credit risk model with both macroeconomic and latent credit factors for Spanish banks during the period 2004–2010. The proposed framework allows to estimate with bank level data both a credit risk model in line with the standard of Basel II and generalized models. I find evidence of persistence in the credit latent factor and of a significant effect of GDP growth and interbank rates on loan default rates. The estimated default correlation is low across specifications, indicating a positive relation between bank concentration and financial stability. The model is also used to calculate the impact on the probabilities of default of stressed economic scenarios. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Carlos Perez Montes, 2015. "Estimation of Regulatory Credit Risk Models," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(2), pages 161-191, October.
    • Handle: RePEc:kap:jfsres:v:48:y:2015:i:2:p:161-191
    DOI: 10.1007/s10693-014-0209-3
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    More about this item

    Keywords

    Credit risk; Default correlation; Stress test; State space model; Bootstrap; MLE; E0; G21;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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