Identifying Threshold Effects in Credit Risk Stress Testing

Author/Editor:

Armando Méndez Morales ; Jose Giancarlo Gasha

Publication Date:

August 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Using data from Argentina, Australia, Colombia, El Salvador, Peru, and the United States, we identify three types of threshold effects when assessing the impact of economic activity on nonperforming loans (NPLs). For advanced financial systems showing low NPLs, there is an embedded self-correcting adjustment when NPLs exceed a minimum threshold. For financial systems in emerging markets in Latin America showing higher NPLs, there is instead a magnifying effect once NPLs cross a (higher) threshold. GDP growth apparently affects NPLs only below a certain threshold, which is consistent with observed lower elasticity of credit risk to changes in economic activity in boom periods.

Series:

Working Paper No. 04/150

Subject:

English

Publication Date:

August 1, 2004

ISBN/ISSN:

9781451856996/1018-5941

Stock No:

WPIEA1502004

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

17

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