Prague Economic Papers 2008, 17(4):340-355 | DOI: 10.18267/j.pep.336

Stress testing of probability of default of individuals

Petr Kadeřábek1, Aleš Slabý2, Josef Vodička3
1 Komerční banka, a.s., Praha; The Institute of Economic Studies of the Charles University, Praha (petrkaderabek@seznam.cz).
2 Komerční banka, a.s., Praha (ales_slaby@kb.cz).
3 Komerční banka, a.s., Praha; Société Genérale, Paris (Josef.Vodicka@socgen.com).

This paper introduces a model for stress testing of probability of default of individuals. The model rests on assumption that the individual defaults if his savings fall below zero. The probability of default is then described as a function of several macroeconomic indicators, such as wages, unemployment and interest rates. Stress testing is carried out by applying exogenous stress scenarios for development of these indicators. The model implies that sensitivity of probability of default to the stress is mainly driven by installment to income ratio and for mortgages also by loan maturity. Hence installment to income ratio is suggested as the appropriate tool to manage credit risk of retail portfolios.

Keywords: credit risk, stress testing, banking, probability of default
JEL classification: E21, E32, G21

Published: January 1, 2008  Show citation

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Kadeřábek, P., Slabý, A., & Vodička, J. (2008). Stress testing of probability of default of individuals. Prague Economic Papers, 17(4), 340-355. doi: 10.18267/j.pep.336
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