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Title:Stress testing German banks in a downturn in the automobile industry PDF Logo
Authors:Düllmann, Klaus
Erdelmeier, Martin
Issue Date:2009
Series/Report no.:Discussion Paper Series 2: Banking and financial studies 2009,02
Abstract:In this paper we stress-test credit portfolios of 28 German banks based on a Mertontype multi-factor credit risk model. The ad-hoc stress scenario is an economic downturn in the automobile industry that constitutes an exceptional but plausible event suggested by historical data. Rather than on a particular stress forecast, the focus of the paper is on the main drivers of the stress impact on banks' credit portfolios. Although the percentage of loans in the automobile sector is relatively low for all banks in the sample, the expected loss conditional on the stress event increases substantially by 70%-80% for the total portfolio. This result confirms the need to account for hidden sectoral concentration risk because the increase in expected loss is driven mainly by correlation effects with related industry sectors. Therefore, credit risk dependencies between sectors have to be adequately captured even if the trigger event is confined to a single sector. Finally, we calculate the impact on banks' own funds ratios. The main results are robust against various robustness checks, namely those concerning the granularity of the credit portfolio, the level of inter-sector asset correlations, and a cross-sectional variation of intra-sector asset correlations.
Subjects:Asset correlation
portfolio credit risk
stress test
sectoral credit concentration
JEL:G21
G33
C13
C15
ISBN:978-3-86558-492-2
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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