Loan Book Credit Risk Stress Testing - Survey on Practice in the Czech Republic

Argayová, Šárka

Stress testing is a general term for framework that assesses possible impact of an adverse shock on the financial health and a capital adequacy of a bank, other financial institution or the whole financial system. Because credit risk is typically the most important risk of a bank and many international surveys describe the credit risk stress testing as one of the least developed, it became the main topic of this thesis. Credit risk stress testing methods developed in the last years very dynamically especially thanks to the requirements on stress testing under the Basel II regulatory framework and a fact that further improvement of these methods is expected to ensure higher financial stability of institutions and financial sector to adverse shocks and enable to withstand severe crisis. The thesis concentrates on the micro level stress tests that are run by each individual bank. It describes the whole credit risk stress testing procedure, Basel II regulatory requirements, the importance of this framework for an institution and offers examples of possible stress testing methods and scenarios. The first significant contribution to the topic is a survey on practice in the mayor Czech banks that analyzes whether they are influenced in their credit risk stress testing framework by their parents or the...

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