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What Drives Aggregate Credit Risk?

Author

Listed:
  • Stefan Kerbl

    (Oesterreichische Nationalbank, On-Site Banking Inspections Division – Large Banks)

  • Michael Sigmund

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

Abstract
A deep understanding of the drivers of credit risk is valuable for financial institutions as well as for regulators from multiple viewpoints. The systemic component of credit risk drives losses across portfolios and thus poses a threat to financial stability. Traditional approaches consider macroeconomic variables as drivers of aggregate credit risk (ACR). However, recent literature suggests the existence of a latent risk factor influencing ACR, which is regularly interpreted as the latent credit cycle. We explicitly model this latent factor by adding an unobserved component to our models, which already include macroeconomic variables. In this paper we make use of insolvency rates of Austrian corporate industry sectors to model realized probabilities of default. The contribution of this paper to the literature on ACR risk is threefold. First, in order to cope with the lack of theory behind ACR drivers, we implement state-of-the-art variable selection algorithms to draw from a rich set of macroeconomic variables. Second, we add an unobserved risk factor to a state space model, which we estimate via a Kalman filter in an expectation maximization algorithm. Third, we analyze whether the consideration of an unobserved component indeed improves the fit of the estimated models.

Suggested Citation

  • Stefan Kerbl & Michael Sigmund, 2011. "What Drives Aggregate Credit Risk?," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 22, pages 72-87.
    • Handle: RePEc:onb:oenbfs:y:2011:i:22:b:2
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    References listed on IDEAS

    as
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    Cited by:

    1. Eidenberger, Judith & Neudorfer, Benjamin & Sigmund, Michael & Stein, Ingrid, 2014. "What predicts financial (in)stability? A Bayesian approach," Discussion Papers 36/2014, Deutsche Bundesbank.
    2. Anastasios Petropoulos & Vasilis Siakoulis & Dionysios Mylonas & Aristotelis Klamargias, 2018. "A combined statistical framework for forecasting default rates of Greek Financial Institutions' credit portfolios," Working Papers 243, Bank of Greece.
    3. Judith Eidenberger & Benjamin Neudorfer & Michael Sigmund & Ingrid Stein, 2013. "Quantifying Financial Stability in Austria, New Tools for Macroprudential Supervision," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 26, pages 62-81.

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    More about this item

    Keywords

    credit risk; unobserved component models; state space; Kalman filter; stress testing;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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