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Macro Stress-Testing on the Loan Portfolio of Japanese Banks

Author

Listed:
  • Akira Otani

    (Bank of Japan)

  • Shigenori Shiratsuka

    (Bank of Japan)

  • Ryoko Tsurui

    (Bank of Japan)

  • Takeshi Yamada

    (Bank of Japan)

Abstract

In recent years, an increasing number of central banks use macro stress-testing as a main tool to assess the robustness of the financial system against severe stresses to the economy, such as deep recessions and sharp rises in interest rates. This paper describes a framework for macro stress-testing on credit risk currently used at the Bank of Japan (BOJ). That framework takes account of changes in borrowers' creditworthiness over the business cycle, thereby enabling us to examine the robustness of loan portfolios for major banks and regional banks against a severe economic downturn. The simulation results, taken from the September 2008 issue of the BOJ's Financial System Report, show that the framework successfully replicates the asymmetric responses of credit risk between deep recession and subsequent economic recovery by using the combination of borrowers' transition between rating classes and different sensitivity of transition probabilities to economic fluctuations across rating classes.

Suggested Citation

  • Akira Otani & Shigenori Shiratsuka & Ryoko Tsurui & Takeshi Yamada, 2009. "Macro Stress-Testing on the Loan Portfolio of Japanese Banks," Bank of Japan Working Paper Series 09-E-1, Bank of Japan.
    • Handle: RePEc:boj:bojwps:09-e-1
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2009/data/wp09e01.pdf
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    References listed on IDEAS

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    1. repec:zbw:bofrdp:2004_018 is not listed on IDEAS
    2. Wei, Jason Z., 2003. "A multi-factor, credit migration model for sovereign and corporate debts," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 709-735, October.
    3. Mr. Mark Swinburne & Stéphanie Marie Stolz & Ms. Marina Moretti, 2008. "Stress Testing at the IMF," IMF Working Papers 2008/206, International Monetary Fund.
    4. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-144, January.
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    Cited by:

    1. Ryo Kato & Shun Kobayashi & Yumi Saita, 2010. "Calibrating the Level of Capital: The Way We See It," Bank of Japan Working Paper Series 10-E-6, Bank of Japan.

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    More about this item

    Keywords

    Macro Stress-Testing; Credit Risk; Transition Matrix; Robustness of Financial System;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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