<p></p><p><br/>Abstract<br/>In recent years, an increasing number of central banks use macro stress-testing as a<br/>main tool to assess the robustness of the financial system against severe stresses to the<br/>economy, such as deep recessions and sharp rises in interest rates. This paper<br/>describes a framework for macro stress-testing on credit risk currently used at the Bank<br/>of Japan (BOJ). That framework takes account of changes in borrowers'<br/>creditworthiness over the business cycle, thereby enabling us to examine the robustness<br/>of loan portfolios for major banks and regional banks against a severe economic<br/>downturn. The simulation results, taken from the September 2008 issue of the BOJ’s<br/>Financial System Report, show that the framework successfully replicates the<br/>asymmetric responses of credit risk between deep recession and subsequent economic<br/>recovery by using the combination of borrowers' transition between rating classes and<br/>different sensitivity of transition probabilities to economic fluctuations across rating<br/>classes.<br/>Key Words: Macro Stress-Testing, Credit Risk, Transition Matrix, Robustness of<br/>Financial System</p>