ABSTRACT

This study deals with stress testing of realistic corporate credit portfolios of individual average small, medium and large banks in Germany. We apply stress tests of single and multiple credit risk parameters by using the internal ratings based (IRB) model and a model that additionally allows for variation of credit correlations. In a severe multiple-parameter stress scenario based on historical data, IRB minimum capital requirements increase by more than 80% with little difference between the credit portfolios. If stress testing is applied to correlation as well, the credit value-at-risk can increase by up to 300% and portfolio differences materialize.