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Credit risk analysis of credit card portfolios under economic stress conditions

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  • Piu Banerjee
  • José J. Canals-Cerdá
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    Abstract

    We develop an empirical framework for the credit risk analysis of a generic portfolio of revolving credit accounts and apply it to analyze a representative panel data set of credit card accounts from a credit bureau. These data cover the period of the most recent deep recession and provide the opportunity to analyze the performance of such a portfolio under significant economic stress conditions. We consider a traditional framework for the analysis of credit risk where the probability of default (PD), loss given default (LGD), and exposure at default (EAD) are explicitly considered. The unsecure and revolving nature of credit card lending is naturally modeled in this framework. Our results indicate that unemployment, and in particular the level and change in unemployment, plays a significant role in the probability of transition across delinquency states in general and the probability of default in particular. The effect is heterogeneous and proportionally has a more significant impact for high credit score and for high-utilization accounts. Our results also indicate that unemployment and a downturn in economic conditions play a quantitatively small, or even irrelevant, role in the changes in account balance associated with changes in an account’s delinquency status, and in the exposure at default specifically. The impact of a downturn in economic conditions and, in particular, changes in unemployment on the recovery rate and loss given default is found to be large. These findings are of particular relevance for the analysis of credit risk regulatory capital under the IRB

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-18.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedpwp:12-18

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    Keywords: Credit ; Unemployment;

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    1. McCall, B.P., 1993. "Unemployment Insurance Rules, Joblessness, and Part-Time Work," Papers 93-07, Minnesota - Industrial Relations Center.
    2. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
    3. Michael Baker & Angelo Melino, 1999. "Duration Dependence and Nonparametric Heterogeneity: A Monte Carlo Study," Working Papers melino-99-01, University of Toronto, Department of Economics.
    4. José Canals-Cerd� & Shiferaw Gurmu, 2007. "Semiparametric competing risks analysis," Econometrics Journal, Royal Economic Society, vol. 10(2), pages 193-215, 07.
    5. Bearse, Peter & Canals-Cerd , Jos & Rilstone, Paul, 2007. "Efficient Semiparametric Estimation Of Duration Models With Unobserved Heterogeneity," Econometric Theory, Cambridge University Press, vol. 23(02), pages 281-308, April.
    6. Sueyoshi, Glenn T, 1995. "A Class of Binary Response Models for Grouped Duration Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(4), pages 411-31, Oct.-Dec..
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