Bank Specific Credit Stress Testing: A Case of Mongolia

Abstract

The paper is based on the regression analysis, credit transition matrix and credit stress testing techniques. In the analysis, 12 Mongolian commercial banks were tested. Analyses were applied to the banks individually, making it more practical and beneficial. The paper has clarified which kind of macroeconomic or bank-specific factors have potential effect on which banks by regression models. Furthermore, the probabilities of loans for economic sectors to migrate down into lower levels are estimated by loan transition matrices. Finally, credit stress testing was applied to each bank respectively using the parameters found in previous analyses. To mention some results: bigger bank's nonperforming loans are related to GDP in negative ways but mid-sized and smaller banks have positive relationship between their nonperforming loan and GDP. Agriculture sector is riskier than other sectors for most banks. Finally, according to the credit stress testing, State and Trans banks will have zero CAR showing that they are defaulted by the test.