Credit Risk and Bank Lending in the Czech Republic

WORKINGPAPERSERIES/6/2004WORKINGPAPERSERIESCreditRiskandBankLendingintheCzechRepublicNarcisaKadlčákováJoergKeplinger6/2004THEWORKINGPAPERSERIESOFTHECZECHNATIONALBANKTheWorkingPaperseriesoftheCzechNationalBank(CNB)isintendedtodisseminatetheresultsoftheCNB-coordinatedresearchprojects,aswellasotherresearchactivitiesofboththestaffoftheCNBandcolaboratingoutsidecontributors.Thisseriessupersedespreviouslyissuedresearchseries(InstituteofEconomicsoftheCNB;MonetaryDepartmentoftheCNB).AllWorkingPapersarerefereedinternationallyandtheviewsexpressedthereinarethoseoftheauthorsanddonotnecessarilyreflecttheofficialviewsoftheCNB.PrintedanddistributedbytheCzechNationalBank.TheWorkingPapersarealsoavailableatčená(CzechNationalBank)JiříWitzany(Komerčníbanka)WilliamWhite(BankforInternationalSettlements)MarcoSorge(BankforInternationalSettlements)KostasTsatsaronis(BankforInternationalSettlements)ProjectCoordinator:TiborHlédik©CzechNationalBank,August2004NarcisaKadlčáková,JoergKeplingerCreditRiskandBankLendingintheCzechRepublicNarcisaKadlčáková∗,JoergKeplinger∗∗AbstractThisprojectundertakesanempiricalanalysisincreditriskmodelingusingadatasamplerepresentativeofbanklendingtotheCzechcorporatesector.Aratingsystemisconstructedusingaproprietarydatabase(Creditreform)thatprovidesasolvencyindexforalargenumberofCzechfirms.Severalmethodsforthecalibrationandvalidationofaratingsystemaredescribedandtestedinpractice.OnthebasisofarepresentativeportfolioforCzechindustries,systemicpredictionsofregulatoryandeconomiccapitalareobtainedandcompared.ThemethodologiesformulatedbythelatestConsultativeDocumentoftheNBCA(April2003)andbytheCreditMetricsandCreditRisk+modelsareapplied.Themaincontributionsofthisprojectcanbebrieflysummarizedasfollows:(a)itshowsinanappliedmannerthatinputdataproblemsincreditriskmodelingcanbeovercome,(b)itshedslightonregulatoryissuesthataregainingincreasingrelevance,and(c)itoutlinesthemostimportantfeaturesoftwocreditriskmodels.JELCodes:G21,G28,G23.Keywords:CreditRisk,EconomicCapital,ExchangeRateExposure,RatingSystem.∗CzechNationalBank,MonetaryandStatisticsDepartment,NaPrikope28,CZ-11503,Prague1,E-mail:[e-mail]∗∗UniversityofInnsbruck,doctoralprogram,Williams&Partner,Luzicka4,CZ-12000,Prague2,E-mail:[e-mail],Tel:[phone]ThispaperwaswrittenwithintheframeworkoftheCzechNationalBankResearchProjectNo.C4/2003.2NarcisaKadlčáková,JoergKeplingerNontechnicalSummaryThebankingsectorworldwidefacesanincreasingneedtoaddressandputinpracticemodernpracticesinthecreditriskarea.BanksareconcernedwithcreditriskmanagementtechniquespartlybecauseofthenewregulationsoftheBaselCommittee.Atthesametime,increasedcompetitionisforcingbankstodevelopandimplementinternalprocessesinordertofindtheoptimalmixbetweentakingrisks,maximizingreturnsandcreatingtheirowncapitalprovisions.Thisneedwillbefeltevenmorestronglyincountrieswithtransitioneconomieswheretheimplementationofcreditriskmanagementproceduresisatanincipientphaseandwherethelackofinputdataisinmanycasessevere.Anessentialrequirementincreditriskmanagementisthecreationofarating(scoring)system.Whilerating(scoring)systemsmayproveusefulforalargearrayofbankactivities,theyarebecomingincreasinglyrelevantforregulatoryandeconomiccapitalprovisioning.InthispaperaratingsystemisconstructedfortheCzechcorporatesectorusingaproprietarydatabase(Creditreform)thatprovidesasolvencyindexforalargenumberofCzechfirms.AlthoughthemethodologyforconstructingthesolvencyindexandthemainfeaturesoftheCreditreformdatasetarebrieflypresented,themainemphasisisputupontheconstructionandvalidationoftheratingsystem.Thereliabilityofthemethodusedtoconstructtheratingsystemistestedthroughasetofstatisticalmeasuresofthepowerofthemodel(powercurvesandGinicoefficients)andofthepredictivepowerofthemodel(Alpha-andBeta-errors,accuracyratiosandinformationentropyratios).Anaturalextensionofthepaperistocompareregulatoryandeconomiccapitalestimationsaccordingtodifferentcreditriskmodelingapproaches.Weapplytwocreditriskmodels(CreditMetrics,CreditRisk+)andthelatestConsultativeDocumentoftheNBCA(April2003).Thesecapitalestimationsreflecta“macro”lendingviewinthesensethatallloansgrantedbybanksactiveintheCzechRepublicareaggregatedattheindustrylevelandallotherrequiredriskinputsareestimatedatthislevel.OurresultscanbeseenasanoverallempiricalassessmentoftheNewBaselCapitalAccordandofseveralcreditriskmodelsanalyzingthebankcreditconditionsintheCzecheconomy.Thequantitativeresultsofthepapercanbebrieflysummarized:•SeveralvalidatingtestsshowthatourratingsystemdisplaysasimilarperformancetoratingsystemsconstructedonthebasisofCreditreformdatainAustriaorGermany.•TheregulatorycapitalestimatedaccordingtotheIRBapproachoftheNewBaselAccordisintherangeestimatedbythecreditriskmodelsata95%confidencelevel.Amongthecreditriskmodelsimplemented,theCreditMetricsmodelpredictedthelowesteconomiccapitalvalues.However,thisoutcomeisduetoseveralsimplificationsmadeinordertocircumventthenon-availabilityofinputdataintothismodel.CreditRiskandBankLendingintheCzechRepub