A framework for stress-testing banks' credit risk

Abstract

This study develops a framework for stress-testing the credit exposures of Hong Kong’s retail banks to macroeconomic shocks. Macro stress-testing is performed with the framework to assess the vulnerability of banks’ overall loan portfolios and mortgage exposures. A variety of shocks, similar to those occurred during the Asian financial crisis, are individually introduced into the framework for the tests. The results show that even for the value-atrisk at the confidence level of 90%, banks would continue to make a profit in most of the stressed scenarios, suggesting that the current credit risk of the banking sector is moderate.