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Stress Testing Credit Risk: The Great Depression Scenario
Company: University of Reading
Year Of Publication: 2010
Month Of Publication: March
Pages: 51
Download Count: 34
View Count: 1988
Comment Num: 0
Language: English
Who Can Read: Free
Date: 5-27-2010
Publisher: Administrator
By using Moody’s historical corporate default histories we explore the implications of
scenarios based on the Great Depression for banks’ economic capital and for existing and
proposed regulatory capital requirements. By assuming different degrees of portfolio
illiquidity, we then investigate the relationship between liquidity and credit risk and
employ our findings to estimate the Incremental Risk Charge (IRC), the new credit risk
capital add-on introduced by the Basel Committee for the trading book. Finally, we
compare our IRC estimates with stressed market risk measures derived from a sample of
corporate bond indices encompassing the recent financial crisis. This allows us to
determine the extent to which trading book capital would change in stress conditions
under newly proposed rules. We find that, typically, banking book regulation leads to
minimum capital levels that would enable banks to withstand Great Depression-like
events, except when their portfolios have long
Varotto, Simone Sign in to follow this author
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