Stress Testing Credit Risk: Comparison of the Czech Republic and Germany

The views expressed in this paper are those of their authors and not necessarily the views of the Financial Stability Institute or the Bank for International Settlements. iii Foreword The Financial Stability Institute is pleased to present the winning FSI Award paper for 2008. This award, announced every two years at the time of the International Conference of Banking Supervisors, was established to encourage thought and research on issues relevant to banking supervisors. This year, numerous papers were received on a variety of topics written by supervisors from around the world. A jury of highly qualified individuals chose the winning paper. The jury members and the FSI are pleased to announce that the paper authored Mr Petr Jakubík of the Czech National Bank and Mr Christian Schmieder of the European Investment Bank (and formerly of the Deutsche Bundesbank) has been selected as the winner of the 2008 FSI Award. The authors present their study of credit risk modelling and stress testing within the context of a Merton-type one-factor model. A comparison of data from the corporate and household sectors of the Czech Republic and Germany is made in an effort to model aggregate credit risk. They then establish a framework for stress testing credit risk. Congratulations to Mr Jakubík and Mr Schmieder and the other supervisors who submitted their work for consideration. Their interest in analysing and potentially improving supervisory methods provides a true service to the supervisory community.