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

By Jorge A Chan-Lau, Cheng Hoon Lim, Jose Daniel Rodríguez-Delgado, Bennett W Sutton, Melesse Tashu

June 8, 2017

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Format: Chicago

Jorge A Chan-Lau, Cheng Hoon Lim, Jose Daniel Rodríguez-Delgado, Bennett W Sutton, and Melesse Tashu. Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America, (USA: International Monetary Fund, 2017) accessed December 24, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper suggests a novel approach to assess corporate sector solvency risk. The approach uses a Bottom-Up Default Analysis that projects probabilities of default of individual firms conditional on macroeconomic conditions and financial risk factors. This allows a direct macro-financial link to assessing corporate performance and facilitates what-if scenarios. When extended with credit portfolio techniques, the approach can also assess the aggregate impact of changes in firm solvency risk on creditor banks’ capital buffers under different macroeconomic scenarios. As an illustration, we apply this approach to the corporate sector of the five largest economies in Latin America.

Subject: Asset and liability management, Banking, Commercial banks, Commodity prices, Corporate sector, Economic sectors, Financial institutions, Liquidity indicators, Liquidity management, Loans, Prices

Keywords: Asset correlation, Asset ratio, Asset value of the loan obligor, Bank capital, Bank capital data, Commercial banks, Commodity prices, Corporate sector, Correlation value, Coverage ratio, Debt maturity, Debt ratio, Default risk, Economic scenarios, Firm, Forward intensity models, Global, Interest rate, Liquidity management, Loan default, Loans, Loss distribution, Macro-financial, PD contribution, Return on assets, Simulation, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/133
Stock No:

WPIEA2017133
ISBN:

9781484302811
ISSN:

1018-5941

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