An Exposure at Default Model for Contingent Credit Line (Bag P., Jacobs M.)

Bank Lending Basel I-III Risk-taking and Risk Management

Abstract In-spite of the large volume of Contingent Credit Lines (CCL) in all commercial banks. paucity of Exposure at Default (EAD) models, unsuitability of external data and inconsistent internal data with partial draw-downs have been a major challenge for risk managers as well as regulators in managing CCL portfolios. This current paper is an attempt to build an easy to implement, pragmatic and parsimonious yet accurate model to determine the exposure distribution of a CCL portfolio. Each of the credit lines in a portfolio is modeled as a portfolio of a large number of option instruments which can be exercised by the borrower, determining the level of usage. Using an algorithm similar to the basic CreditRisk and Fourier Transforms we arrive at a portfolio level probability distribution of usage. We perform a simulation experiment in which we illustrate the convolution of two portfolio segments to derive an EAD distribution.
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Libref/ Bag P., Jacobs M. (2010) “An Exposure at Default Model for Contingent Credit Line”, pp. 1-27
© Программирование — Александр Красильников, 2008
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