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Exposure at Default Model for Contingent Credit Line

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  • Bag, Pinaki

Abstract

In-spite of 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-down, has been a major challenge for risk managers as well as regulators for managing CCL portfolios. Current paper is an attempt to build an easy to implement, pragmatic and parsimonious yet accurate model to determine exposure distribution of a CCL portfolio. Each of the credit line in a portfolio is modeled as a portfolio of large number of option instrument which can be exercised by the borrower determining the level of usage. Using an algorithm similar to basic CreditRisk+ and Fourier Transforms we arrive at a portfolio level probability distribution of usage.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20387.

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Date of creation: 01 Apr 2010
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Handle: RePEc:pra:mprapa:20387

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Keywords: EAD; Basel II; Credit Risk; Contingent credit line (CCL);

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  1. Anjan V. Thakor & Gregory F. Udell, 2004. "An Economic Rationale for the Pricing Structure of Bank Loan Commitments," Finance, EconWPA 0411053, EconWPA.
  2. O. Emre Ergungor, 2001. "Theories of loan commitments: a literature review," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-19.
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  4. Amir Sufi, 2009. "Bank Lines of Credit in Corporate Finance: An Empirical Analysis," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1057-1088, March.
  5. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
  6. Gabriel Jiménez & José A. López & Jesús Saurina, 2008. "Empirical analysis of corporate credit lines," Banco de Espa�a Working Papers 0821, Banco de Espa�a.
  7. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
  8. Maksimovic, Vojislav, 1990. " Product Market Imperfections and Loan Commitments," Journal of Finance, American Finance Association, American Finance Association, vol. 45(5), pages 1641-53, December.
  9. Agarwal, Sumit & Ambrose, Brent W. & Liu, Chunlin, 2006. "Credit Lines and Credit Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(1), pages 1-22, February.
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