Stress testing of real credit portfolios

Stress testing has become a crucial point on the Basel II agenda, mainly as Pillar I estimatesdo not explicitly take portfolio concentration into account. We start from the credit portfolioof the German pension insurer being a cross-sectional representation of the German economyand subsequently compose three bank portfolios corresponding to a small, medium and largebank. We apply univariate and multivariate stress tests both by using the Internal Rating based(IRB) model and by a model that additionally allows for variation of correlation. In a severemultivariate stress scenario based on historical data for Germany IRB capital requirementsincrease by more than 80% with little differences between the credit portfolios. If stresstesting is additionally applied to correlation, the Value-at-Risk increases by up to 300% andportfolio differences materialize.[...]