Dynamic Stress Test Diffusion Model Considering the Credit Score Performance

Genest, benoit and Fares, Ziad and Gombert, Arnault (2014): Dynamic Stress Test Diffusion Model Considering the Credit Score Performance. Published in: Risk.net

Abstract

After the crisis of 2008, and the important losses and shortfall in capital that it revealed, regulators conducted massive stress testing exercises in order to test the resilience of financial institutions in times of stress conditions. In this context, and considering the impact of these exercises on the banks’ capital, organization and image, this white paper proposes a methodology that diffuses dynamically the stress on the credit rating scale while considering the performance of the credit score. Consequently, the aim is to more accurately reflect the impact of the stress on the portfolio by taking into account the purity of the score and its ability to precisely rank the individuals of the portfolio.

• Item Type: MPRA Paper
• Language: English
• Keywords: Basel III, Dodd Frank, Stress testing, CCAR, Gini, Rating scale, PD
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; G - Financial Economics > G1 - General Financial Markets

References

European Banking Authority (2014). Results of 2014 EU-Wide stress test

Basel Committee on Banking Supervision (2009). Principles for sound stress testing practices and supervision

Citi (2013). 2013 Annual Stress Testing Disclosure, Dodd-Frank Wall Stresst Reform and Consumer Protection Act

European Central Bank (2014). Comprehensive Assessment Stress Test Manual

European Central Bank (2014). Asset Quality Review, Phase 2 Manual

Radovan Chalupka and Juraj Kopecsni. Modelling Bank Loan LGD of Corporate and SME segments, A case study

Roger M. Steun (2012). The Role of Stress Testing in Credit Risk Management

Antonella Foglia. Stress Testing Credit Risk: A Survey of Authorities' Approaches

Haralt Scheule, UTS Business Scholl. Credit Risk and economic downturns : Stress testing

Michael Jacobs, Ph.D, CFA (2012). Stress Testing Credit Risk Portfolios