Template-Type: ReDIF-Article 1.0

Author-Name: Gergő Horváth
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Email: horvathge@mnb.hu


Title: Corporate Credit Risk Modelling in the Supervisory Stress Test of the Magyar Nemzeti Bank

Abstract: As a regulatory and decision-supporting tool, the stress test framework plays an
important role in assessing the vulnerability of the domestic financial system and
the individual institutions. Consequently, continuous development of the models
used in parameter estimation is of crucial importance. This study aims to improve
credit risk loss estimation, which is one of the most important components of the
supervisory stress test framework, by making the estimation of corporate default
and transition probability more accurate. The study is based on a client-level default
database, which contains various actors in the Hungarian banking sector and covers
an entire economic cycle (2007-2017). It is unique as it introduces a uniform stage
classification rule for determining the transition probabilities which attempts to
create harmony with domestic institutions' loan loss provision policies under IFRS
9. Based on the research findings, it can be concluded that - relying on a wide-ranging
set of macroeconomic and client-level variables - it is possible to separate
corporate debtors with adequate discriminatory power as well as to estimate
point-in-time probability of default (PIT PD) and transition probabilities at the
corporate level relevant in terms of the stress test, and thus to approximate the
loan loss provisioning requirement arising in a stress situation. Of the factors
capturing the cyclical nature of corporate default probability, the state of the labour
market and the income position of the household sector were identified as the main
determinants by the study.

Classification-JEL: G21, C51, C30
Keywords: stress test, credit risk, PD, bank, corporate loans, forecast
Pages: 43-73
Volume: 20
Issue: 1
Year: 2021
File-URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-20-1-st2-horvath.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:20:y:2021:i:1:p:43-73