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Credit risk migration rates modelling as open systems II: A simulation model and IFRS9-baseline principles

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  • Landini, S.
  • Uberti, M.
  • Casellina, S.

Abstract

In 2014 the International Accounting Standards Board (IASB) promulgated the current International Financial Reporting Standards 9 – Financial Instruments (IFRS9) that draw new lines for an ex-ante, reliable, unified and well-balanced credit risk assessment. Among others, two principles are of interest to this paper: that of segmented and prospective estimation of expected credit losses. Within the frame of a micro-simulation approach, this paper focuses on these issues while considering the evolution of a bank portfolio. The paper presents an algorithmic procedure developed on a realistic dynamic credit risk migration rates modelling of a portfolio as an open system with entries and exits that is consistent with the segmented and prospective IFRS9 principles. Although operating at the aggregate level of the migration matrix, combining accounting principles inspired to those of the IFRS9-baseline with the open systems modelling, the main conclusion is that it allows for a more reliable provision and ex-ante and forward-looking estimation of expected losses.

Suggested Citation

  • Landini, S. & Uberti, M. & Casellina, S., 2019. "Credit risk migration rates modelling as open systems II: A simulation model and IFRS9-baseline principles," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 175-189.
    • Handle: RePEc:eee:streco:v:50:y:2019:i:c:p:175-189
    DOI: 10.1016/j.strueco.2019.06.013
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    References listed on IDEAS

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    1. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    2. Jinghai Shao & Siming Li & Yong Li, 2016. "Estimation and prediction of credit risk based on rating transition systems," Papers 1607.00448, arXiv.org, revised Mar 2018.
    3. Fei Fei & Ana-Maria Fuertes & Elena Kalotychou, 2012. "Credit Rating Migration Risk and Business Cycles," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 39(1-2), pages 229-263, January.
    4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    5. 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.
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    Cited by:

    1. Di Guilmi, C. & Gallegati, M. & Landini, S. & Stiglitz, J.E., 2020. "An analytical solution for network models with heterogeneous and interacting agents," Journal of Economic Behavior & Organization, Elsevier, vol. 171(C), pages 189-220.
    2. Bischi, Gian Italo & Matsumoto, Akio & Carrera, Edgar J. Sanchez, 2020. "Foreword to the SCED special issue on “Nonlinear Social Dynamics”," Structural Change and Economic Dynamics, Elsevier, vol. 52(C), pages 236-237.

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    More about this item

    Keywords

    Credit risk; Migration rates models; Micro-simulation; Expected loss; Accounting standards;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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