Stress Testing in Consumer Banking-Case Study of Credit Card Portfolio

• Main Authors: Wei,An Ni, 魏安妮
• Other Authors: Wu,Jack
• Format: Others
• Language: en_US
• Online Access: http://ndltd.ncl.edu.tw/handle/78401518225797063753

碩士 === 國立政治大學 === 國際經營管理英語碩士學位學程(IMBA) === 98 === Stress Testing in Consumer Banking- Case Study of Credit Card Portfolio Financial institutions have grown increasingly complex and diverse in recent years. Hence, financial institutions emphasize more on strengthening their risk management mechanism. The completeness of risk management techniques are regard as the competitive advantages of the institution. One set of risk management techniques that has attracted a great deal of attention is “stress testing”. Many banks paid a heavy price during the Asian Economic crisis of 1997-98. Prior to the crisis, banks assessed customers’ credit worthiness using their traditional expertise in individual risk assessment. However, this assessment was applicable only to normal business conditions. As long as the exceptional stress event occurred, the entire customers credit-worthy changed, resulting in extreme losses. This illustrates the importance of banks have a sound credit stress testing program. In this thesis, author takes one commercial bank’s credit card portfolio as an example by applying the stress testing framework introduced in literature. In this stress testing process, the author set up two hypothetical scenarios – worse case and meltdown case - to compare with the base scenario and demonstrate the result of each scenario with the impact of loss, capital adequacy ratio and coverage ratio. In the stress testing result, the bank will generate additional NT$498.9 millions of credit loss in worse case and NT$1859.4 millions of credit loss in meltdown case. The bank can still stay safe in terms of capital adequacy. However, the coverage ratio is insufficient. It is suggested to take remedial actions to increase the provision directly or lower the NPL amount by tightening credit card policies such as stop granting credit limit to customers whose outstanding debt increased recently or lower customers’ credit limit or freeze cash advance transactions to prevent from further losses. Suggestions for banks which adopt stress testing are: (1) Conduct further portfolio segmentation base upon the portfolio characteristics; (2) Conduct stress testing process on a timely basis; (3) Senior management’s involvement in stress testing process is essential; (4) Document all the rationales; (5) Adjust stress testing based upon the purposes or risk types; (6) The effectiveness and robustness of stress tests should be assessed regularly.