Macro Stress Testing On Credit Risk Of Commercial Banks In China

Abstract

In recent years, a lot of effort has been put into stress testing on credit risk of banks all over the world. The New Basel Capital Accord, Basel Ⅱ, imposes the rigorous stress testing requirements: banks which implement the Internal Ratings-Based Approach (IRB) must conduct stress tests. The China Banking Regulatory Commission (CBRC) also requires all Chinese commercial banks to implement stress testing to manage credit risk. During the current financial crisis, stress testing on credit risk became a reviving focus of concern.Macro stress testing refers to a range of techniques used to assess the vulnerability of a financial system to “exceptional but plausible” macroeconomic shocks (see Blaschke et al, 2001 and Sorge, 2004). Most researchers design macro stress testing by modeling the link between macroeconomic variables and credit risk measures. Sensitivity analysis, scenario analysis, and extreme values are usually employed to implement the stress testing.