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Macro stress tests and history‐based stressed PD: the case of Hong Kong

Michael Chak‐sham Wong (Department of Economics and Finance, City University of Hong Kong, Hong Kong)
Yat‐fai Lam (Banking Policy Department, Hong Kong Monetary Authority, Hong Kong)

Journal of Financial Regulation and Compliance

ISSN: 1358-1988

Article publication date: 25 July 2008

Abstract

Purpose

The purpose of this paper is to discuss issues relating to stress testing methods for credit risks in banks. Also, it suggests a solution to bank supervisors on evaluating stress test results.

Design/methodology/approach

Discussion is based on cases analysis on a stress period of the Hong Kong banking sector.

Findings

The paper finds that econometric modeling does not work well modeling stress scenarios. The stressed probability of default (PD) provided by Basel II would be much higher than stressed PD observed in the history.

Practical implications

Bank supervisors should develop cost‐effective methods to monitor the stress test results reported by banks.

Originality/value

The paper addresses the issues of stress testing and provides a practical solution for bank supervisors to monitor stress test results reported by banks.

Keywords

Citation

Chak‐sham Wong, M. and Lam, Y. (2008), "Macro stress tests and history‐based stressed PD: the case of Hong Kong", Journal of Financial Regulation and Compliance, Vol. 16 No. 3, pp. 251-260. https://doi.org/10.1108/13581980810888868

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited