Risks in domestic banks' corporate lending business

We introduce an empirical approach to studying credit risk in the corporate loan portfolio. First, historical adverse scenarios for loss rates are identified at sector level. Second, we estimate the empirical association between loan losses and economic growth and then apply it to a scenario of adverse economic growth. We additionally model an increase in risk weights for banks that use an internal ratings-based approach (IRBA) to calculate the capital adequacy requirement for their loan portfolio.