IDEAS home Printed from
   My bibliography  Save this article

Parsimonious exposure-at-default modeling for unfunded loan commitments


  • Pinaki Bag
  • Michael Jacobs


Purpose - The purpose of this paper is to build an easy to implement, pragmatic and parsimonious yet accurate model to determine an exposure at default (EAD) distribution for CCL (contingent credit lines) portfolios. Design/methodology/approach - Using an algorithm similar to the basic CreditRisk+ and Fourier Transforms, the authors arrive at a portfolio level probability distribution of usage. Findings - The authors perform a simulation experiment which illustrates the convolution of two portfolio segments to derive an EAD distribution, chosen randomly from Moody's Default Risk Service (DRS) database of CCLs rated as of 12/31/2008, to derive an EAD distribution. The standard deviation of the usage distribution is found to decrease as we increase the number of puts used, but the mean value remains relatively stable, as the extreme points converge towards the mean to produce a shrinkage in the spread of the distribution. The authors also observe, for the sample portfolio, that an increase in the additional usage rate level also increases the volatility of the associated exposure distribution. Practical implications - This model, in conjunction with internal bank financial institution research, can be used for banks' EAD estimation as mandated by Basel II for bank CCL portfolios, or implemented as part of a Solvency II process for insurers exposed to credit sensitive unfunded commitments. Apart from regulatory requirements, distributions of stochastic exposure generated can be inputs for different economic capital models and stress testing procedures used to capture an accurate risk profile of the portfolio, as well as providing better insights into the problem of managing liquidity risk for a portfolio of CCLs and similar exposures. Originality/value - In-spite of the large volume of CCLs in portfolios of financial institutions all (for commercial banks holding these as well as for insurance companies having analogous exposures), paucity of EAD models, unsuitability of external data and inconsistent internal data with partial draw-downs have been a major challenge for risk managers as well as regulators in managing CCL portfolios.

Suggested Citation

  • Pinaki Bag & Michael Jacobs, 2011. "Parsimonious exposure-at-default modeling for unfunded loan commitments," Journal of Risk Finance, Emerald Group Publishing, vol. 13(1), pages 77-94, December.
  • Handle: RePEc:eme:jrfpps:v:13:y:2011:i:1:p:77-94

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Gabriel Jiménez & Jose A. Lopez & Jesus Saurina, 2009. "Empirical Analysis of Corporate Credit Lines," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5069-5098, December.
    2. Martin Eling & Hato Schmeiser & Joan T. Schmit, 2007. "The Solvency II Process: Overview and Critical Analysis," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 10(1), pages 69-85, March.
    3. Avery, Robert B. & Berger, Allen N., 1991. "Loan commitments and bank risk exposure," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 173-192, February.
    4. Agarwal, Sumit & Ambrose, Brent W. & Liu, Chunlin, 2006. "Credit Lines and Credit Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 1-22, February.
    5. Thakor, Anjan V. & Udell, Gregory F., 1987. "An economic rationale for the pricing structure of bank loan commitments," Journal of Banking & Finance, Elsevier, vol. 11(2), pages 271-289, June.
    6. Martin, J. Spencer & Santomero, Anthony M., 1997. "Investment opportunities and corporate demand for lines of credit," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1331-1350, October.
    7. Elena Loukoianova & Salih N. Neftci & Sunil Sharma, 2006. "Pricing and Hedging of Contingent Credit Lines," IMF Working Papers 06/13, International Monetary Fund.
    8. Hawkins, Gregory D., 1982. "An analysis of revolving credit agreements," Journal of Financial Economics, Elsevier, vol. 10(1), pages 59-81, March.
    9. Maksimovic, Vojislav, 1990. " Product Market Imperfections and Loan Commitments," Journal of Finance, American Finance Association, vol. 45(5), pages 1641-1653, December.
    Full references (including those not matched with items on IDEAS)


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:jrfpps:v:13:y:2011:i:1:p:77-94. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.