Stress Testing and Calibration of Macroprudential Policy Tools

August 14, 2020

Preview Citation

Format: Chicago

Lucyna Gornicka, and Laura Valderrama. Stress Testing and Calibration of Macroprudential Policy Tools, (USA: International Monetary Fund, 2020) accessed December 21, 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

We present a semi-structural model of default risk, which is a function of loan and borrower characteristics, economic conditions, and the regulatory environment. We use this model to simulate bank credit losses for stress-testing purposes and to calibrate borrower-based macroprudential tools. The proposed approach is very flexible and is particularly useful when there is limited history of crisis episodes, when crises bring unanticipated shocks where past tail events offer little guidance and when structural shocks or changes in financial regulations have altered the loan default process. We apply the model to quantify mortgage lending risk in two distinct mortgage markets. For each application, we show a range of modeling adjustments that can be made to capture country-specific institutional features. The model uses bank portfolio data broken down by risk bucket and vintage, which enables us to take explicit account of the loan life cycle and to incorporate the housing and economic cycles. This feature facilitates a timely assessment of banks’ loss-absorbing capacity and the buildup of systemic risk conditional on policy. It also enables counterfactual analysis and the evaluation of macroprudential policy interventions.

Subject: Financial institutions, Financial sector policy and analysis, Housing prices, Loans, Macroprudential policy, Mortgages, Prices, Real estate prices

Keywords: Calibration, Credit risk, Default rate, Global, House price, Housing market, Housing prices, Loan loss, Loans, Loss rate, Macroprudential policy, Margin call, Mortgage portfolio, Mortgage risk, Mortgages, Negative equity, Net present value, Real estate, Real estate prices, Second mortgage, Simulation, Stress testing, Systemic risk, WP

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/165
Stock No:

WPIEA2020165
ISBN:

9781513554471
ISSN:

1018-5941

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