Credit risk stress test: The case of an Iranian bank

One of the main goals of banks is financial stability over time. To achieve this goal, banks need to identify and control the risks they may face in the future. One of the practical tools in this regard is Stress Test. Stress tests are effective tools in crisis management identifying possible destructive events. They are one of the most important requirements for banks in Basel 1 and 2. There are many ways to do a stress test, from a simple sensitivity analysis to a variety of scenario analyses. This article aims to perform a credit risk stress test using a scenario analysis method for an Iranian bank. First, macroeconomic and financial variables affecting the performance of the bank loan portfolio are selected. In the following a linear regression between the loan performance variables and the selected variables is performed. A Vector Auto-Regression (VAR) model is then implemented on the independent variables to discover the relationship between them and to generate scenarios. After generation of the scenarios finally, the probability of default values are evaluated under the baseline and stressed scenarios. The results show that consumer price index, gold price, rental rate, money volume and long-term interest rate have the most impact on credit portfolios.