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Multi-year dynamics for forecasting economic and regulatory capital in banking

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  • Daniel Rösch
  • Harald Scheule

Abstract

ABSTRACT The determination of future credit loss distributions constitutes a fundamental challenge in many credit risk applications such as the calculation of economic and regulatory capital as well as the pricing of loans, portfolios or derivatives thereof. Currently, best practice is to assume a one-year risk horizon for the derivation of the credit loss distribution. However, the maturities of most credit risky products exceed one year and the credit loss of the whole product life has to be taken into account. This article investigates the impact of multi-year forecasts of credit risk parameters such as probabilities of default and correlations on the distribution of future losses to a credit portfolio. Moreover, the implications are demonstrated for collateralized debt obligations.

Suggested Citation

  • Daniel Rösch & Harald Scheule, . "Multi-year dynamics for forecasting economic and regulatory capital in banking," Journal of Credit Risk, Journal of Credit Risk.
    • Handle: RePEc:rsk:journ1:2160715
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    Cited by:

    1. Orth, Walter, 2013. "Multi-period credit default prediction with time-varying covariates," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 214-222.
    2. Orth, Walter, 2011. "Multi-period credit default prediction with time-varying covariates," MPRA Paper 30507, University Library of Munich, Germany.
    3. Peter Grundke & Kamil Pliszka, 2018. "A macroeconomic reverse stress test," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1093-1130, May.
    4. Lee, Yongwoong & Rösch, Daniel & Scheule, Harald, 2016. "Accuracy of mortgage portfolio risk forecasts during financial crises," European Journal of Operational Research, Elsevier, vol. 249(2), pages 440-456.

    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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