Credit Behaviour of Clients in Slovakia and the Czech Republic

Recent global financial crisis has caused that financial risk measurement - especially the measurement of the credit risk - remains a significant priority in current banking. This paper discusses the problem of estimating the transition probability of client credit behaviour when aggregate proportional data are known. The paper examines the dynamics of credit risk through rating migrations and shows linkages between rating migration and prevailing macroeconomic conditions expressed in GDP growth. Markov Chain methodology is considered as an appropriate method for transition matrices estimation. This paper compares transition probabilities for different economic conditions in Slovakia and the Czech Republic. Transition probability matrices estimated in this paper provide a basis for comparing bank sector. We have separate the economy into two states, when GDP growth was above/below average and we have computed the conditioned transition matrices on these states. We show that the period with a GDP above the average were more stable in both countries. Our findings may have implications for credit risk managers in financial institutions. Moreover our results give a useful framework for stress testing of the credit portfolios.