The impact of the COVID-19 crisis on bank corporate credit risk management in the US and the UK

• Název práce v češtině: Dopad COVID-19 krize na řízení korporátního úvěrového rizika v bankách v USA a VB
• Název v anglickém jazyce: The impact of the COVID-19 crisis on bank corporate credit risk management in the US and the UK
• Klíčová slova: banka, COVID-19 krize, řízení úvěrového rizika, pravděpodobnost defaultu
• Klíčová slova anglicky: bank, COVID-19 crisis, credit risk management, probability of default
• Akademický rok vypsání: 2019/2020
• Typ práce: bakalářská práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: prof. PhDr. Petr Teplý, Ph.D.
• Řešitel: Bc. Matěj Kořínek - zadáno vedoucím/školitelem
• Datum přihlášení: 24.04.2020
• Datum zadání: 24.04.2020
• Datum a čas obhajoby: 08.06.2021 09:00
• Místo konání obhajoby: Opletalova - Opletalova 26
• Datum odevzdání elektronické podoby: 03.05.2021
• Datum proběhlé obhajoby: 08.06.2021
• Oponenti: Mgr. Lucie Kraicová

Zásady pro vypracování

Research question and motivation
In this thesis, we will discuss the impact of the COVID-19 crisis on bank corporate credit risk management in the US and the UK. Recently, IMF (2020) warned that global financial conditions have tightened abruptly with the onset of the COVID-19 pandemic and that banks’ resilience may be tested as economic and financial market stress rise. Other researchers such as Baldwin et al. (2020) or BCBS (2020) highlight the importance of the proper functioning financial system in various countries, the role of regulation, and the proper response from the respective credit risk managers.

In accordance with the recent global banking standards called Basel III, banks are allowed to use their own specific models to evaluate credit risk (BCBS, 2017). This measure might create room for potential misspecification of risk-weighted assets in pursuit of greater profitability. On the other hand, regulators try to minimize this problem by several exercises designed to test the validity of those models under stress situations (Chatterjee, 2015).

The motivation of this thesis is to explore the impact of the COVID-19 crisis on bank corporate credit risk in the US and the UK. As a proxy of corporate credit risk, we will use the corporate aggregate probability of default (PD) provided by Credit Benchmark, a London-based company specializing in this industry. To measure the impact of the COVID-19 crisis on corporate aggregate PD, we will use macroeconomic variables, financial market variables, and proxies for both the shock caused by COVID-19 and fiscal measures employed by both countries. The proxies are the COVID-19 stringency index -proposed by Hale et al. (2020), and dummy variable(s). We aim to build our hypotheses on those two aforementioned proxies. We aim to at least difference all variables in our models. Hence the key variables in the hypotheses will be stated in the form of “change”.
Hypotheses:
1. Fiscal measures were not significant determinants of change of corporate aggregate probability of default in the US.
2. Fiscal measures were not significant determinants of change of corporate aggregate probability of default in the UK.
3. Growth of stringency index was not a significant determinant of change of corporate aggregate probability of default in the US.
4. Growth of stringency index was not a significant determinant of change of corporate aggregate probability of default in the UK.

Contribution
If we manage to reject the given hypotheses, our contribution will be fourfold. Firstly and secondly, rejecting Hypotheses 1 and 2 will demonstrate that fiscal measures were effective in preventing corporate defaults. Based on that, we will provide our recommendations for calculating regulatory capital. Thirdly and fourthly, rejecting Hypotheses 3 and 4 will show that aggregate PD is not only determined by standard macroeconomic and financial market variables as it is usually assumed in the literature.

Seznam odborné literatury

Baldwin, R., Mauro, B. W. d., (eds.) et al, (2020), Economics in the Time of Covid-19. Centre for Economic Policy Research, 33 Great Sutton Street, London, EC1V 0DX, UK: CEPR Press, ISBN: 978-1-912179-28-2

BCBS (2017). Basel III: Finalising post-crisis reforms, Basel Committee on Banking Supervision, ISBN 978-92-9259-022-2 (online)

BCBS (2020). Measures to reflect the impact of Covid-19, Basel Committe on Banking Supervision, ISBN 978-92-9259-358-2 (online)

IMF (2020). Global financial stability overview, ch.1, International Monetary fund, April 2020

Chatterjee S. (2015). Modelling credit risk, Centre for Central Banking Studies, Bank of England, Threadneedle Street, London, EC2R 8AH, 2015, ISSN: 1756-7270

Mejstřík, M., Pečená, M., Teplý, P. (2014). Banking in Theory and Practice, Praha: Karolinum, pp. 324-374, ISBN: 9788024628707

Wooldridge, J. (2016). Introductory Econometrics: A Modern Approach. 6th ed. Cengage Learning

Předběžná náplň práce

Outline
1. Introduction
2. Theoretical background
2.1 Credit risk management and regulation in banking
2.1.1 Basel regulation in banks
2.1.2 IFRS 9
2.1.3 Models for estimating default probabilities
2.2 Implications of the COVID-19 crisis for banks
3. Literature review hypotheses
4. Methodology description
5. Data description
6. Empirical analysis
6.1 Corporate sector in the US
6.2 Corporate sector in the UK
6.3 Hypothesis 1
6.4 Hypothesis 2
6.5 Hypothesis 3
6.6 Hypothesis 4
6.7 Robustness checks
6.8 Contribution and recommendations
6.9 Further research opportunities
7. Conclusion
8. Bibliography