Identifying Threshold Effects in Credit Risk Stress Testing

By Armando Méndez Morales, Jose Giancarlo Gasha

August 1, 2004

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Armando Méndez Morales, and Jose Giancarlo Gasha. Identifying Threshold Effects in Credit Risk Stress Testing, (USA: International Monetary Fund, 2004) accessed October 5, 2024

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.

Subject: Business cycles, Credit risk, Loans, Nonperforming loans, Threshold analysis

Keywords: GDP growth, WP

Publication Details

Pages:

17
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/150
Stock No:

WPIEA1502004
ISBN:

9781451856996
ISSN:

1018-5941

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