Conditional Loss Estimation Using a South African Global Error Correcting Macroeconometric Model
AbstractActive credit portfolio management is becoming a central part of capital and credit management within the banking industry. Stimulated by the Basel II capital accord the estimation of risk sensitive credit and capital management is central to success in an increasingly competitive environment. If any risk mitigation or value-enhancing activity is to be pursued, a credit portfolio manager must be able to identify the interdependencies between exposures in a portfolio, but more importantly, be able to relate credit risk to tangible portfolio effects on which specific actionable items can be taken. This analysis draws on the macroeconometric vector error correcting model (VECM) developed by De Wet et al. (2007) and applies the proposed methodology of Pesaran, Schuermann, Treutler and Weiner (2006) to a fictitious portfolio of corporate bank loans within the South African economy. It illustrates that it is not only possible to link macroeconomic factors to a South African specific credit portfolio, but that scenario and sensitivity analysis can also be performed within the credit portfolio model. These results can be used in credit portfolio management or standalone credit risk analysis, allowing practical credit portfolio management and value enhancing applications.
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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200826.
Length: 30 pages
Date of creation: Jul 2008
Date of revision:
Credit portfolio modelling; macroeconometric correlation model; economic capital; scenario analysis; default threshold;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-AFR-2008-07-30 (Africa)
- NEP-ALL-2008-07-30 (All new papers)
- NEP-BAN-2008-07-30 (Banking)
- NEP-RMG-2008-07-30 (Risk Management)
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