Buncic, DanielMelecky, Martin2012-03-192012-03-192012-01-01https://hdl.handle.net/10986/3221Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materializing credit risk. The authors apply the proposed approach to a set of Eastern European banks and discuss the results.CC BY 3.0 IGOACCOUNTINGASSET CLASSASSET CLASSESBALANCE SHEETBANK BORROWERSBANK CREDITBANK FOR INTERNATIONAL SETTLEMENTSBANK LENDINGBANK PROFITSBANKING CRISESBANKING SECTORBANKING SYSTEMBANKING SYSTEMSBANKSBENCHMARKBONDBUFFERBUFFERSBUSINESS CYCLEBUSINESS CYCLESCAPITAL ADEQUACYCAPITAL REQUIREMENTCAPITAL REQUIREMENTSCASH FLOWCENTRAL BANKCLASSIFIED LOANSCOLLATERALCONSENSUS FORECASTSCONSUMER LOANSCONSUMERSCONTROL VARIABLESCORRECTIVE ACTIONCREDIT BOOMCREDIT BOOMSCREDIT CARDCREDIT CARDSCREDIT CONTRACTSCREDIT EXPOSURESCREDIT GROWTHCREDIT LINESCREDIT PROVISIONCREDIT RISKCREDIT RISK EXPOSURESCREDIT RISKSCREDITSCURRENCY APPRECIATIONCURRENCY CRISESCURRENCY CRISISCURRENCY DEPRECIATIONCURRENCY VALUEDEBTDEBT HOLDERDECISION MAKINGDEFAULT SITUATIONSDEFAULTSDEPENDENTDEPENDENT VARIABLEDEPRECIATIONSDERIVATIVESDEVELOPING COUNTRIESDEVELOPMENT POLICYDIVIDENDSDOLLAR EXCHANGE RATEDOMESTIC CURRENCYDUMMY VARIABLESECONOMETRIC MODELECONOMIC GROWTHECONOMIC RISKEFFECT OF EXCHANGE RATE CHANGESELASTICITYEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET ECONOMIESEMPLOYMENTEQUILIBRIUM MODELSEXCHANGE RATEEXCHANGE RATE MOVEMENTSEXTERNAL COMPETITIVENESSFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEEPENINGFINANCIAL DISTRESSFINANCIAL REGULATIONFINANCIAL SECTORFINANCIAL STRESSESFINANCIAL SYSTEMFINANCIAL SYSTEMSFOREIGN BANKSFOREIGN CURRENCYFOREIGN CURRENCY DEBTFOREIGN CURRENCY EXPOSURESFOREIGN CURRENCY LENDINGFUTURE FINANCIAL CRISESFUTURE RESEARCHFUTURE VALUEGDP PER CAPITAGENERAL EQUILIBRIUMGENERAL EQUILIBRIUM MODELSGROWTH RATESHOLDINGINCOMEINCOME EFFECTINCOME INEQUALITYINDIVIDUAL ASSETINDIVIDUAL BANKINDIVIDUAL BANKSINFLATIONINFORMATION DISCLOSUREINSOLVENCYINSOLVENCY THRESHOLDINSTRUMENTINTEREST PARITYINTERNATIONAL BANKINTERNATIONAL BANKSJUDGMENTLENDING PRACTICESLETTERS OF CREDITLIQUIDITYLIQUIDITY RISKLOANLOAN COMMITMENTSLOAN CONCENTRATIONLOAN LOSSLOAN LOSS PROVISIONSLOAN MATURITYLOANS TO CREDIT INSTITUTIONSLOCAL CURRENCYLONG-RUN EQUILIBRIUMMACROECONOMIC CONDITIONSMACROECONOMIC DATAMACROECONOMIC MODELMACROECONOMIC MODELSMACROECONOMIC RISKSMACROECONOMIC SHOCKSMACROECONOMIC VARIABLEMACROECONOMIC VARIABLESMATURITY MISMATCHESMATURITY TRANSFORMATIONMATURITY TRANSFORMATIONSMIDDLE INCOME COUNTRIESMONETARY FUNDMORTGAGEMORTGAGE LOANSMULTIPLIERSNET EXPORTSNET LOSSNET LOSSESNOMINAL EXCHANGE RATENON-PERFORMING LOANSNONPERFORMING LOANSNPLOPEN ECONOMYOUTPUT LOSSOVERDUE LOANSPARTICULAR ASSETPENALTYPOLICY RESPONSEPORTFOLIOPORTFOLIOSPOTENTIAL EXPOSUREPROBABILITY OF DEFAULTPROBLEM BANKSPUBLIC AGENCIESREAL GDPREAL INTERESTREAL INTEREST RATEREGIONAL BANKSREGRESSION ANALYSISREPAYMENTREPAYMENT CAPACITYRESERVESRETURNRETURN ON ASSETSRISK FACTORSRISK PROFILESRISK WEIGHTED ASSETSSECURITIESSERIAL CORRELATIONSHAREHOLDERSSIMULATION TECHNIQUESSOLVENCYSOLVENCY PROBLEMSSTEADY STATESUBSIDIARIESSYSTEMIC RISKTIER 1 CAPITALTRANSITION ECONOMIESTROUGHUNCERTAINTYVARIANCE-COVARIANCE MATRIXWEIGHTSZERO WEIGHTWorld Bank10.1596/1813-9450-5936