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Assessing Portfolio Credit Risk Changes in a Sample of EU Large and Complex Banking Groups in Reaction to Macroeconomic Shocks

by Olli Castrén of the European Central Bank,
Trevor Fitzpatrick of the European Central Bank, and
Matthias Sydow of the European Central Bank

February 2009

Abstract: In terms of regulatory and economic capital, credit risk is the most significant risk faced by banks. We implement a credit risk model based on publicly available information with the aim of developing a tool to monitor credit risk in a sample of large and complex banking groups (LCBGs) in the EU. The results indicate varying credit risk profiles across these LCBGs and over time. Furthermore, the results show that large negative shocks to real GDP have the largest impact on the credit risk profiles of banks in the sample. Notwithstanding some caveats, the results demonstrate the potential value of this approach for monitoring financial stability.

JEL Classification: C02, C19, C52, C61, E32.

Keywords: Portfolio credit risk measurement; stress testing; macroeconomic shock measurement.

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