Stress Testing Exposure of Banks to Sectors of the Ghanaian Economy

ABSTRACT

The capacity of Ghanaian banks to absorb large but plausible losses resulting from concentration of individual bank loan portfolios in sectors of the Ghanaian economy is investigated. Stress scenarios consist of worsening of banks’ impaired loan charges by one, two and three standard deviations of the industry’s recent distribution of non-performing loans. Findings reveal that the capital adequacy ratios of many banks would have been negatively impacted, some to the point of becoming insolvent. It is argued that, though these would be micro-prudential breaches, they are of such magnitude as to have economy-wide repercussions. Thus, bank loan portfolios are too concentrated.

KEYWORDS:

• Credit risk
• loan concentration
• stress tests
• capital adequacy
• Ghana
• micro-prudential regulation

Additional information

Funding

This work was supported by the University of Ghana Business School.