Abstract
This paper develops a framework for stress-testing the credit risk of Chinese commercial banks to macroeconomic shocks. Using data over the period 1985-2008, this study establishes a vector auto-regression (VAR) model to describe the links between default rate and macroeconomic factors, and then designs three stress scenarios to implement the stress testing by Monte Carlo simulation. As a result, a credit loss distribution is generated. Our results indicate that the shocks in real property and CPI bring long term and worst impact on credit risk to commercial banks in China.
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