Abstract
The current global financial crisis has highlighted the importance of understanding financial stability especially in the context of managing credit risk, in the banking sector. The key motivation for this paper is to improve our knowledge of credit risk modelling at the country level especially under the framework of Basel-II capital adequacy standards. The aim of the study is to investigate the interaction between the cyclical implications of aggregate defaults in an economy and the capital stock of a bank. The approach used requires the construction of a macroeconomic credit model that provides the framework to perform scenario analysis. Within this framework, our study forms the basis of a comparative analysis of two countries, a relatively immune economy from the recent crisis - Australia and the worst effected economy - the USA. The key questions posed in the study are which macro-economic variables are important for both countries in determining default risk; in addition, we examine the impact of adverse macroeconomic shocks on default rates in both countries. The study finds that compared to Australia, the US economy is much more susceptible to adverse macroeconomic shocks; employing data for key macro economic variables from 1995Q1 to 2009Q2 for both countries the results indicate that the same set of macro-economic variables indicates different default rates for the two counties.
Original language | English |
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Pages (from-to) | 123-131 |
Number of pages | 9 |
Journal | Journal of International Finance and Economics |
Volume | 10 |
Issue number | 1 |
Publication status | Published - 2010 |
Keywords
- financial crises
- macroeconomics