Stress testing German banks against a global credit crunch
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This paper investigates the impact of a global credit crunch on the corporate credit portfolios of large German banks using a two-stage approach. First, a macroeconometric simulation model (NiGEM) is used to forecast the impact of a substantial increase in the cost of business capital for firms worldwide in three particularly export-oriented industry sectors in Germany. Second, the impact of this economic multi-sector stress on bank credit portfolios is captured by a state-of-the-art Credit Metrics-type portfolio model with sector-dependent unobservable risk factors as drivers of the systematic risk. In our assessment of capital ratios, we confirm that both the increase of the capital charge for the unexpected loss and the increase in banks’ expected losses need to be considered. We also find that the availability of granular information at the level of borrower-specific probabilities of default has a significant impact on the stress test results.
KeywordsAsset correlation Portfolio credit risk Macroeconomic stress tests
JEL ClassificationG21 G33 C13 C15
We thank Martin Erdelmeier and Meik Eckhardt for their excellent research assistance and Björn Wehlert for his support in collecting data from the German credit register. We also thank the Economics Department of the Deutsche Bundesbank for providing us macroeconomic indicators conditional on a global credit crunch scenario. We are grateful for comments from Scott Deacle, Antonella Foglia, Frank Heid, Stefan Mittnik, Til Schuermann, participants of the 2008 Bundesbank research council meeting, the 2008 Bundesbank seminar on banking and finance, the 2010 workshop on “Models and Tools for Macro-Prudential Supervision” in Washington organized by the Research Task Force of the Basel Committee on Banking Supervision, the \(12\)th Symposium on Finance, Banking, and Insurance 2011 in Karlsruhe, the German Finance Association (DGF) Meeting 2012 in Hanover, and the 2013 Financial Management Association Meeting in Chicago. Markus Schmid (the editor) and an anonymous referee added further perspectives to our work and helped greatly by improving focus and presentation.
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