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Comparison of stress testing models for regulatory purposes by institutions using the IRBA method
[Porovnání stres test modelů pro regulatorní účely institucí využívajících IRBA metodu]

Author

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  • Michal Kováč

Abstract

This paper deals with the comparison of stress tests of institutions using the IRBA method for determining the capital requirement. Different approaches have been used to determine the values of risk parameters PD, EAD and LGD for stres test purpose. Besides the VEC model, which link risk parameters to selected macroeconomic variables, stress tests were constructed using the absolute values model, the relative change model and the VaR model, CVaR respectively. Individual approaches have been tested and compared in two levels. In the first level was stressed only the risk parameter PD, in the second level, all risk parameters were stressed. Empirical analysis on the retail portfolio of retail clients in the Czech Republic during 2005 - 2017 showed some significant differences in the value of capital among some approaches. It has also been demonstrated that by using the appropriate method for stressing only the PD parameter, the same value of capital can be achieved as in the case of stressing all risk parameters simulating the conditions required by the Basel Committee.

Suggested Citation

  • Michal Kováč, 2018. "Comparison of stress testing models for regulatory purposes by institutions using the IRBA method [Porovnání stres test modelů pro regulatorní účely institucí využívajících IRBA metodu]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2018(3), pages 41-56.
    • Handle: RePEc:prg:jnlcfu:v:2018:y:2018:i:3:id:516:p:41-56
    DOI: 10.18267/j.cfuc.516
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    References listed on IDEAS

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    1. Martin Hibbeln, 2010. "Risk Management in Credit Portfolios," Contributions to Economics, Springer, number 978-3-7908-2607-4.
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    3. 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.
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    More about this item

    Keywords

    Stress test; Retail clients; VECM; VaR; Historical simulation; Stres test; Retail klientela; Historické simulace;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • 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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