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Volume 69, Issue 6


Modeling Credit Losses for Multiple Loan Portfolios

Gapko, Petr; Smid, Martin

Year: 2019   Volume: 69   Issue: 6   Pages: 558-579

Abstract: We propose a dynamic structural model of credit risk of multiple loan portfolios. In line with Merton, Vasicek and Pykhtin, we assume that a loan defaults if the assets of the debtor fall below his liabilities, and the subsequent loss is determined by the collateral value. For each loan, the assets, liabilities and the collateral value each depends on a common and an individual factor. By applying our model to two nationwide United States loan portfolios with real estate collateral, we demonstrate its considerable predicting power and show that, similarly to calculations under prudential regulation, it can be used within financial institutions to measure credit risk under various macroeconomic situations and different probability levels. This makes the model usable for quantification of loan loss allowances under IFRS9 or for stress tests of credit risk.

JEL classification: G32

Keywords: credit risk, mortgage, loan portfolio, dynamic model, cointegration

RePEc: https://ideas.repec.org/a/fau/fauart/v69y2019i6p558-579.html

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