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Approaches to stress testing for regulatory purposes by institutions using the IRBA method
[Konstrukce stres testu pro regulatorní účely modelem VEC]

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  • Michal Kováč

Abstract

The paper deals with the stress test of institutions using IRBA method for determining the capital requirement. The VEC model was used to quantify the links between the macroeconomic variables and the risk parameters of PD, EAD and LGD. In addition to the construction of the VEC model itself, the paper presents the process of selecting appropriate macroeconomic variables and aggregating risk parameters. To design the stress scenario, the method of maximum penalizing the risk parameters of PD was used because of the failure to prove the links between the macroeconomic variables and the EAD and LGD parameters. Empirical analysis of individual variables and subsequent quantification of capital for stress test purposes was performed on the real portfolio of the retail client.

Suggested Citation

  • Michal Kováč, 2018. "Approaches to stress testing for regulatory purposes by institutions using the IRBA method [Konstrukce stres testu pro regulatorní účely modelem VEC]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2018(2), pages 43-59.
    • Handle: RePEc:prg:jnlcfu:v:2018:y:2018:i:2:id:512:p:43-59
    DOI: 10.18267/j.cfuc.512
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    References listed on IDEAS

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    1. Antonella Foglia, 2009. "Stress Testing Credit Risk: A Survey of Authorities' Aproaches," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 9-45, September.
    2. Jim Wong & Ka-Fai Choi & Tom Pak-Wing Fong, 2008. "A Framework for Stress Testing Banks’ Credit Risk," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Hans Genberg & Cho-Hoi Hui (ed.), The Banking Sector in Hong Kong, chapter 11, pages 240-260, Palgrave Macmillan.
    3. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    4. Glenn Hoggarth & Andrew Logan & Lea Zicchino, 2005. "Macro stress tests of UK banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 392-408, Bank for International Settlements.
    5. Jan Willem van den End & Marco Hoeberichts & Mostafa Tabbae, 2006. "Modelling Scenario Analysis and Macro Stress-testing," DNB Working Papers 119, Netherlands Central Bank, Research Department.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    More about this item

    Keywords

    Stress test; Retail clients; VECM; IRBA; Stres test; Retail klientela;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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