Stress-Testing Credit Risk Parameters - An Application toRetail Loan Portfolios

Financial institutions are faced with the challenge to forecast future credit portfolio losses.It is common practice to focus on portfolio models consisting of a limited set of parameters,such as the probability of default, asset correlation, loss given default or exposure at default.A simple portfolio model is also used in the Basel II framework for calculating regulatory capital.With regard to the stability of the financial system, these models have to be approvedby regulators who have an interest in a conservative assessment of the credit portfolio risk andrequire the stress-testing of risk estimates.The present paper is the first in its kind to develop a framework to stress the smallest buildingblock, the sensitivities of risk drivers and therefore any derivative...