Stress Testing the Enterprise Sector's Bank Debt: A Micro Approach

This paper describes Norges Bank’s micro stress-testing framework for assessing the Norwegian banking sector’s losses on loans to the nonfinancial enterprise sector. Using projected macro variables and a stock-flow approach, annual financial statements of every firm in Norway are projected five years ahead. The loan loss potential is then assessed using a creditscoring model. We present a backtest of projections, taking the history of macro variables as given. Our results are fairly good using a relatively simple setup, and we conclude that stockflow projections of financial statements can be useful for stress testing banks’ loan portfolios.