Stress testing: assessing possible impacts of COVID-19 pandemia on the credit default in Portugal

Abstract

The current health crisis is shaking the economic and financial world and Portugal was no exception. The present dissertation main goal is to assess the credit risk impact by the current situation due to COVID-19 pandemic in Portugal. The key objective is to evaluate credit inherent risk, in order to be able to intervene in advance and to mitigate possible risks, as well as predict likely defaults. In order to predict possible serious effects in terms of credit default having, the present dissertation has as its object the study of the impact of macroeconomic variables and their influence on credit default. An exploratory quantitative approach was used in the empirical study, complemented with a qualitative approach, focused fundamentally on the description of the results obtained with the SPSS software. Linear regression models were tested, which were defined as independent variable o credit default. As dependent variables the indicators of credit risk management; UR, LR, LMC, LCC, LBC, EUR, GDP, PSI, DIG, CPI, ER and CP. Among all these indicators of credit risk management used, the ones that had the greatest impact were the LR, LMC, UR, GDP, CPI and CP have more significant effect. However, the variable CP does not suggest the existence of a direct and reliable relationship between the independent variable, but recent studies refer to it as one of the most important to be considered. As noted in world history, the impacts of financial disasters, reinforce the need for systematic analysis and effective financial stability instruments. In order to forecast those situations, stress testing will be used to predict possible scenarios of induced financial crisis by the current healthy crisis, such as credit risk, in specific. To be able to foresee, a country macroeconomic analysis is needed, by merging several credit components, as established by the Basel agreements. The data herein as reference has taken from Banco de Portugal, INE, Stooq and oecd, since the 2003 to 2020, in order to be provisions regarding economic.