portfolio, the single borrower exposure, the large borrowers’ exposure, unhedged borrowers’ FX exposures, etc. Overall, CSEECBs quantify EADs according to the general practice, namely as the volume of the non-defaulted portfolio.

Additional indicators and/or models are used to analyze exposures to credit risk. The Slovak Central Bank constructs an indicator of credit risk exposure, “loans-at-risk”, represented by the share of loans to corporates that report losses and declines in revenues.<sup>22</sup> The “loans-at-risk” indicator is based on micro data from a sample of companies from the Corporate Credit Register and on financial statements from the Statistical Office.<sup>23</sup> The Czech Central Bank’s 2010 FSR (see CNB, 2010) describes an ad-hoc test of portfolio concentration. This test considers banks’ credit risk exposures related to the three largest debtors of each bank. Practically, for the period identified as the peak of the adverse phase of the credit cycle, losses from the assumed bankruptcy of the three largest debtors of each bank were added to the standard loan losses. However, the impact largely depends on the LGDs. The analysis considered two extreme LGDs, 45 percent and 100 percent. The impact of such an ad-hoc test turned out to be dramatic if LGD was 100 percent. The Central Banks of Kosovo and Montenegro also report working with simulations concerning the effects of largest debtors’ defaults.

While there are significant off-balance sheet exposures, such as preapproved credit card limits, overdrafts, and guarantees for direct cross-border loans in CSEE countries, none of the CSEECBs appears to account for these exposures in their stress tests.

# **5.2. Market Risk Exposures**

The exposures to market risk are represented by those financial positions for which the changes in interest rates and exchange rates can generate losses. Interest rate risk changes affect the net interest income through the time-to-repricing gaps and time-to-maturity gaps. The value of financial instruments in the balance sheets is also affected by the interest rate adjustments. The exchange rate risk exposure of banks is probably the easiest to recognize and consists of net open positions in each foreign currency.

The Albanian, Austrian, Bosnia & Herzegovina, Croatian, Czech, Greek, Kosovo, Macedonia, Montenegro, Romanian, Slovak and Slovenian stress-testing models take into consideration the effect of a change in the interest rate on the net interest income and on the value of securities’ holding. The effect of changes in exchange rates on the net open foreign currency positions is also evaluated in Albania, Austria, Croatia, the Czech Republic, Greece, Montenegro, Macedonia, Romania, Serbia, and the Slovak Republic.

# **5.3. Liquidity Risk Exposures**

The liquidity exposure is broadly defined as the obligations due during a specified number of days (usually exceeding 30 days) and is derived from liabilities and irrevocable, committed credit lines. The exposure related to liabilities is ideally calculated under the assumptions about rollover and replacement of maturing deposits

> 22 Similar underlying idea to the one the Romanian Central Bank uses to compute LLP. 23

> The shock associated with this in the stress test analysis is a 100 percent default rate for “loans-at-risk”.

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