Macro Stress-Testing on the Loan Portfolio of Japanese Banks
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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.
C51, E32, E37, G21
Macro Stress-Testing, Credit Risk, Transition Matrix, Robustness of Financial System
This paper was written based on the joint work of authors while all of us belonged to the Financial Systems and Bank Examination Department. We thank Toshiaki Watanabe (Hitotsubashi University), participants in the Paris meeting of the Stress Testing Subgroup of the Research Task Force of the Basel Committee on Banking Supervision and the seminar held at the Bank of Tokyo-Mitsubishi, UFJ, Ltd., and staff of the Bank of Japan for their helpful comments. The views expressed in this paper are our own and do not necessarily reflect the official views of the Bank of Japan or the Financial Systems and Bank Examination Department.
- *1 Monetary Affairs Department, Bank of Japan
- *2 Institute for Monetary and Economic Studies, Bank of Japan
- *3 Financial Systems and Bank Examination Department, Bank of Japan
- *4 Personnel and Corporate Affairs Department, Bank of Japan (London School of Economics and Political Science)
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