A newly developed approach to stress testing banks’ credit losses from corporate lending
News, Staff memo Stress tests are important when assessing the resilience of Swedish banks to different scenarios in which economic conditions deteriorate. A new Staff Memo describes a newly developed approach to stress testing banks' credit losses from corporate lending based on detailed microdata on all Swedish non-financial corporations and their loans with Swedish banks.
The Riksbank is working continuously to further develop and broaden its framework for capital stress tests. In recent years, one focus area has been to develop stress testing methods based on microdata. One advantage of using microdata instead of aggregate data is that it allows us to capture company-specific characteristics. This means that the results of the stress tests are to a large extent influenced by the risks of the individual companies and how these risks evolve over time. Another advantage is that the estimated models are very robust due to the millions of observations in the dataset. On the other hand, the availability of microdata is currently limited, which makes it difficult to capture the risks in banks' total loan portfolios and thus assess their overall resilience.
The microdata-based stress tests of banks’ credit losses that the authors have described are complete in the sense that they already have everything needed to be used in practical stress testing. However, this does not mean that the approach is fully developed. Indeed, the authors highlight several areas in which microdata-based stress testing of banks’ credit losses can be developed and improved. For example, being able to include more loan segments as additional microdata becomes available.
By Niklas Amberg, working in the Monetary Policy Department of the Riksbank, and Jieying Li and Jakob Winstrand, working in the Financial Stability Department.