Macro Stress Testing of Selected Banks in India: An Intermodelling Approach Using the VAR Framework

The COVID-19 pandemic has proved that credit risk for financial institutions need not be idiosyncratic and could have its roots in a system-wide health crisis. Times of economic downturns and the failure of few 'giants' in the industry has pushed the regulators, Central bankers and economi...

Full description

Saved in:
Bibliographic Details
Published in:IPE Journal of Management 2022-01, Vol.12 (1), p.1-29
Main Authors: Ranganathan, Nitin, Raju, G Raghavender
Format: Article
Language:English
Subjects:
Banking industry
Banks
Capital requirements
COVID-19
Credit risk
Economic growth
Financial institutions
Financial reporting
GDP
Gross Domestic Product
International finance
Pandemics
Public sector
Stock exchanges
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The COVID-19 pandemic has proved that credit risk for financial institutions need not be idiosyncratic and could have its roots in a system-wide health crisis. Times of economic downturns and the failure of few 'giants' in the industry has pushed the regulators, Central bankers and economists globally to model 'market risk' as a determinant of 'credit risk'. As a humble attempt in this direction, we ventured into estimating a risk model using the Vector Autoregressive (VAR.) framework with variables representing the various facets of market risk like Economic, Currency, Interest rate, Commodity and Asset price risk during the period 2010 QI - 2020 Q3 to explain the Default rates of the Indian banking system at a disaggregated level. The results from the model and ac-companying Post-VAR estimations showed that Credit risk is explained by Market risk and had spillover effects into the Market risk variables.The stress tests indicate that the 'Moratorium period' imposed by the RBI has been effective in curtailing shocks to NPA during the pandemic and the banks have capital adequacy to deal with an economically stressed scenario like the present. However, as the Pandemic continues its onslaught, the creation of a 'Bad Bank' and 'Recapitalizations' are inevitable. Some of our inferences from this study are novel to the area of'Risk Management' for banks in India.
ISSN:2249-9040