Basel II framework requires banks to conduct stress tests on their potential future minimum capital requirements and consider ‘at least the effect of mild recession scenarios’. We propose a stress testing framework for minimum capital requirements in which banks’ corporate credit risks are...

In the discussion paper, we employ data on industry-specific corporate sector bankruptcies over the time period from 1986 to 2003 and estimate a macroeconomic credit risk model for the Finnish corporate sector. The sample period includes a severe recession with significantly higher-than-average...

This publication consists of ten separate studies on payment and settlement systems employing simulation techniques. Most of these were carried out using the payment and settlement system simulator BoF-PSS2 provided by the Bank of Finland. The preliminary versions were presented at the annual...

This publication consists of nine separate studies on payment and settlement systems conducted using simulation techniques. Most have been carried out using the payment and settlement system simulator BoF-PSS2 provided by the Bank of Finland. The preliminary versions were presented at the annual...

Building on the work of Sorge and Virolainen (2006), we revisit the data on aggregate Finnish bank loan losses from the corporate sector, which covers the ‘Big Five’ crisis in Finland in the early 1990s. Several extensions to the empirical model are considered. These extensions are then used...

This publication consists of fifteen studies on payment and settlement systems conducted using computational or simulation techniques. The studies have been presented at the simulator seminars arranged by the Bank of Finland during the years 2009–2011. The main focus of the studies is on the...

This paper analyses the importance of individual bank-specific factors on financial stability. First, we use a novel method to model the spreading of the contagion in the interbank network by implementing an epidemiologic model. Actual data on European banks is exploited with simulated...

We present a model of risky debt in which collateral value is correlated with the possibility of default. The model is then used to study: 1) the expected amount of debt recovered in the event of default as a function of collateral; and 2) the amount of collateral needed to mitigate the...

Interest rate risk is a major concern for banks because of the nominal nature of their assets and the asset-liability maturity mismatch. This paper proposes a new way to derive a bank’s interest rate sensitivity, by examining separately the effects of interest rate changes on existing loans...

Using a sample of 161 global banks in 23 countries, we examine the applicability of structural models and bank fundamentals to price global bank credit risk. First, we find that variables predicted by structural models (leverage, volatility, and risk-free rate) are significantly associated with...