Macro-stress testing of credit risk for Chinese Banking sector: Two comparative approaches

With Basel II officially implemented in China, Macro-stress test exercises of credit risk are getting more and more important. In order to study the effectiveness of current methods in analyzing credit risk for Chinese Banking sector, Wilson model and quantile regression are applied in this paper. We find that QR approach can provide more refined results. Our Stress-testing exercises at the one-quarter horizon indicate that interest rate shock produces the most harmful effects followed by GDP growth and import growth, whereas distressed inflation and distressed housing price show little impact on non-performing loan rate(NPL), as an indicator of credit risk. Lastly, the simulated data shows that Wilson results tend to underestimate credit risk, which warns the practitioners that macro-stress testing generally employed may provide a biased direction.