Identifying Threshold Effects in Credit Risk Stress Testing
August 1, 2004
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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.
Subject: Business cycles, Credit risk, Loans, Nonperforming loans, Threshold analysis
Keywords: GDP growth, WP
Pages:
17
Volume:
2004
DOI:
Issue:
150
Series:
Working Paper No. 2004/150
Stock No:
WPIEA1502004
ISBN:
9781451856996
ISSN:
1018-5941
