The framework models banks’ capital asset ratios as a function of future losses and credit growth, using a generalised method of moments to calibrate shocks to credit quality and credit growth. The analysis is complemented by a simple measure of systemic risk, which captures tail risk co-movement among banks in the system.
The main contribution of this paper is to advance a simple framework to integrate systemic risk scenarios that assess the impact of aggregate and idiosyncratic factors. The analysis is based on CreditRisk+, which uses analytical techniques - similar to those applied in the insurance industry - to estimate banks’ credit portfolio loss distributions, making no assumptions about the cause of default.
An integrated framework for systemic risk analysis needs to consider risks from both the macro-economic environment and banks’ interconnectedness. This paper uses a general setup to present a simple framework to assess the resilience of a banking system to aggregate and idiosyncratic shocks, advancing a toolbox that can be used in financial sector risk assessments. In this framework:
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banks’ CARs are modelled in a format that considers the simultaneous impact of future credit losses, credit growth, and the credit spread;
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the analysis focuses on economic measures of solvency and uses a generalised method of moments to calibrate the shocks to NPLs and credit growth;
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uncertainty about banks’ future losses is modelled in CreditRisk+, which relies on analytical techniques to find the banks’ credit portfolio loss distributions;
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a simple systemic risk indicator is proposed to measure tail risk comovements among the banks in the system; and
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quantile regressions and CreditRisk+ are used to model banks’ conditional VaRs.
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