Estimation of credit losses with macroeconomic variables and stress testing-a macroeconomic approach for the Turkish banking sector

Due to banking and finance crises that have become more frequent, severe and common recently and experienced difficulties in establishing and maintaining the financial stability, detecting and analyzing the vulnerabilities of financial systems are becoming highly important for countries and international institutions that pursue the financial stability.The direction and the magnitude of the statistical relationship, known to exist, between macroeconomic variables and the systemic component of credit risk provides invaluable opportunities to the banks, regulatory and supervisory institutions and other authorities responsible for financial stability, to manage the credit risk-which is the most important of all the risks that financial sector bears- and to estimate the probable credit losses and take the necessary actions in a timely manner.Stress tests are the most valuable tools to detect potential vulnerabilities in individual financial institutions as well as in financial sector, which originate from the developments in macro risk factors. Stress tests are also very important risk management tools for the financial institutions.In this study, inspired by the Credit Portfolio View approach developed by Thomas Wilson in 1997 and later international studies that adopted this approach for credit risk stress testing purposes, it is intended to develop models and methodologies that will enable the estimation of credit losses and the credit risk stress testing with macroeconomic variables in Turkish Banking Sector. Empiric findings, obtained by using developed models to estimate credit losses and stress testing, confirms the explanatory power of the macroeconomic variables for systematic credit risk.