1/2010 Rasmus Kattai. Credit risk model for the Estonian banking sector

Working Papers of Eesti Pank. No. 1/2010

This paper gives an overview of the credit risk model that has been developed for the Estonian banking system. The non-performing loans and loan loss provisions of the four largest banks and the rest of the banking sector have been modelled conditional on the underlying economic conditions: economic growth, unemployment, interest rates, in- flation, indebtedness and credit growth. The model highlights the importance of economic growth as the most influential factor behind the soundness of the banking sector in the latest downturn. The expected fall in output volatility will probably decrease the relative importance of output growth and increase the role of interest rates in the future.
JEL Code: E32, E37, G17, G21
Key words: credit risk, stress testing, financial soundness indicators, Estonian banking sector

* The author is grateful to Michael Boss and Claus Puhr from the Oesterreichische Nationalbank, Per Åsberg-Sommar, Lars Frisell and Malin Omberg from Sveriges Riksbank, and Karlo Kauko and Kimmo Virolainen from Suomen Pankki for the warm welcome and enlightening meetings at their home institutions in Autumn 2008, and last but not least to Siret Vildo.

Author's e-mail address: rasmus.kattai [at] eestipank.ee

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.


1. Introduction
2. Related literature and practices
3. Structure of the Credit Risk Model
4. Uses of the model
5. Conclusions
Appendix 1. Equations and identities in the Credit Risk Model
Appendix 2. Matrix representation of the VAR model
Appendix 3. VAR model estimation results
Appendix 4. Matrix representation of non-performing loans and loan loss provisions equations
Appendix 5. VAR model impulse responses

Credit Risk Model for the Estonian Banking Sector, Working Papers of Eesti Pank No 1/2010 (PDF*)

* To read PDF file, you need Adobe® Acrobat® Reader™ freeware, it may be downloaded from Adobe homepage.