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Macro stress tests and history‐based stressed PD: the case of Hong Kong

Macro stress tests and history‐based stressed PD: the case of Hong Kong Purpose – The purpose of this paper is to discuss issues relating to stress testing methods for credit risks in banks. Also, it suggests a solution to bank supervisors on evaluating stress test results. Design/methodology/approach – Discussion is based on cases analysis on a stress period of the Hong Kong banking sector. Findings – The paper finds that econometric modeling does not work well modeling stress scenarios. The stressed probability of default (PD) provided by Basel II would be much higher than stressed PD observed in the history. Practical implications – Bank supervisors should develop cost‐effective methods to monitor the stress test results reported by banks. Originality/value – The paper addresses the issues of stress testing and provides a practical solution for bank supervisors to monitor stress test results reported by banks. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Regulation and Compliance Emerald Publishing

Macro stress tests and history‐based stressed PD: the case of Hong Kong

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1358-1988
DOI
10.1108/13581980810888868
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to discuss issues relating to stress testing methods for credit risks in banks. Also, it suggests a solution to bank supervisors on evaluating stress test results. Design/methodology/approach – Discussion is based on cases analysis on a stress period of the Hong Kong banking sector. Findings – The paper finds that econometric modeling does not work well modeling stress scenarios. The stressed probability of default (PD) provided by Basel II would be much higher than stressed PD observed in the history. Practical implications – Bank supervisors should develop cost‐effective methods to monitor the stress test results reported by banks. Originality/value – The paper addresses the issues of stress testing and provides a practical solution for bank supervisors to monitor stress test results reported by banks.

Journal

Journal of Financial Regulation and ComplianceEmerald Publishing

Published: Jul 25, 2008

Keywords: Financial models; Financial institutions; Modelling; Econometrics; Stress; Hong Kong

References