Stress-testing of the Russian Banking Sector: Contingent Claims Analysis Approach

Sammanfattning: This study aims to perform stress-testing of the Russian banking sector with a focus on credit risk measures derived by using contingent claims analysis, an extension of Black-Scholes and Merton option pricing theory. Risk exposure indicators are linked to a number of macroeconomic variables that describe global and domestic economic and financial development. To reduce the dimension of the dataset, principal component analysis is applied. The derived factors of financial stability, economic growth, and interest rates together with credit risk measures are used in vector autoregressions so as to draw impulse response functions, which allows for stress-testing of the analyzed banks by estimating the effect of adverse and severe adverse shocks to the factors specified by 95% and 99% VaR. Stress test analysis revealed that shock to the economic growth factor shows more persistence compared to the financial stability factor. Surprisingly, shock to the interest rates factor resulted to be insignificant at a chosen lag length. The results also suggest high degree of banks’ heterogeneity, which complicates a derivation of a parsimonious model suitable for the whole system. While international banks are barely affected by the proposed shocks, domestic banks, regardless of their size, may react rather strongly to the financial stability and economic growth shocks – to the point of reaching distress level within several months after the adverse event.