This paper presents a stress test for corporate exposures of UK banks. The default
process is modelled via a Merton model and several macroeconomic as well market
factors are identified as systematic risk factors. We then simulate the expected loss
distribution for UK banks conditional on drawings of macroeconomic risk factors.
The overall conclusion of our simulation is quite reassuring as even in the worst
macroeconomic conditions expected losses of banks corporate exposures are not high
enough to cause a bank failure. A key finding of our work is that systematic factors
have a non-linear and non-symmetric impact on credit risk and that these effects are
most important for highly adverse scenarios which are the main interest from a stress
testing perspective. We also argue that this model can be a step towards an integrated
approach of stress testing market and credit risk.