Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America

IMF Working Papers, June 8, 2017

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Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America

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Bibliographic details

• Authors: Jorge A Chan-Lau, Cheng Hoon Lim, Jose Daniel Rodríguez-Delgado, Bennett W Sutton, Melesse Tashu
• Published: June 8, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484302811.001

Overview

• Proposes a Bottom-Up Default Analysis that projects probabilities of default of individual firms conditional on macroeconomic conditions and financial risk factors.
• Enables a direct macro-financial link to assessing corporate performance and facilitates what-if scenarios.
• Applied to the corporate sector of the five largest economies in Latin America as an illustration.

Methodology

• Projects firm-level probabilities of default (PDs) conditional on:
  • Macroeconomic conditions.
  • Financial risk factors.
• Can be extended with credit portfolio techniques to aggregate firm-level outcomes to the banking sector level.

Key Findings and Capabilities

• Allows assessment of corporate sector solvency risk through firm-level PD projections.
• Facilitates what-if scenario analysis linking macroeconomic shocks to firm solvency.
• When combined with credit portfolio techniques, permits assessment of the aggregate impact of changes in firm solvency risk on creditor banks’ capital buffers under different macroeconomic scenarios.

Applications and Policy Relevance

• Illustrative application: corporate sectors in the five largest economies in Latin America.
• Relevant subject areas: Asset and liability management; Banking; Commercial banks; Commodity prices; Corporate sector; Economic sectors; Financial institutions; Liquidity indicators; Liquidity management; Loans; Prices.
• Keywords indicating analytic focus: asset correlation; asset ratio; asset value of the loan obligor; bank capital; bank capital data; coverage ratio; debt maturity; debt ratio; default risk; economic scenarios; forward intensity models; interest rate; loan default; loss distribution; Macro-financial; PD contribution; return on assets; simulation.

Content in this bundle

• Bottom-Up Default Analysis of Corporate Solvency Risk, WP/17/133, June 2017
  • Bottom-Up Default Analysis of Corporate Solvency Risk, WP/17/133, June 2017 (Markdown version)
  • Bottom-Up Default Analysis of Corporate Solvency Risk, WP/17/133, June 2017 (PDF)