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Testing to extreme: An application of reverse stress testing engineering on mortgages of commercial banks in China

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  • Chang Liu
  • Lin Tang
  • Dongtao Lin
  • Jiayi Guo

Abstract

The real estate market has been booming in China for the past 10 years. Highly leveraged on banks' credit, it has aroused regulators' attention because of the potential catastrophic consequence, and it may produce on the whole financial system if the housing price boom bursts and massive defaults on mortgages occur. In this article, reverse stress testing engineering has been employed to study the factors impacting significantly on the mortgages' defaults and their implicit transition mechanism under different simulated scenarios. This work, which produces more precise snapshots of the financial institutes' risk tolerances by pushing the risk factors to their limits, could be used by regulators for formulating housing price control policies and by banking management for implementing the credit default risk warning system.

Suggested Citation

  • Chang Liu & Lin Tang & Dongtao Lin & Jiayi Guo, 2023. "Testing to extreme: An application of reverse stress testing engineering on mortgages of commercial banks in China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 187-192, January.
    • Handle: RePEc:wly:ijfiec:v:28:y:2023:i:1:p:187-192
    DOI: 10.1002/ijfe.2414
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    References listed on IDEAS

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