IDEAS home Printed from
   My bibliography  Save this paper

Forecasting and Stress-testing the Risk-based Capital Requirements for Revolving Retail Exposures


  • Dunbar, Kwamie

    () (John F. Welch College of Business, Sacred Heart University)


This paper presents a tractable and empirically sound technique for generating stressed probabilities of default (PDs) which are then used to derive loss rates for the provisioning of a bank’s risk-based capital. This work is in response to the recent regulatory findings attributed to the Supervisory Capital Assessment Program (SCAP) stress tests of 2009 which revealed weaknesses in the existing regulatory and economic capital approaches. The SCAP projected losses of approximately $82.4 Billion in banks’ credit card portfolios for 2010, highlighting the need for better forecasting and stress testing of revolving retail exposures. This study proposes a timely model that will improve the ability of banks to determine the capital adequacy of revolving retail exposures. Using options theory we discuss why an obligor may default and produce estimates of expected losses from our stressed PDs so as to determine loss provisions. This method relies on the simulation of PD distributions via changes in selected macroeconomic variables and the card holder’s debt to income ratio (DTIR). The methodology offers the flexibility of being tractable and scalable to data in the issuer’s credit card portfolio by geography and credit quality of the obligor.

Suggested Citation

  • Dunbar, Kwamie, 2012. "Forecasting and Stress-testing the Risk-based Capital Requirements for Revolving Retail Exposures," Working Papers 2012001, Sacred Heart University, John F. Welch College of Business.
  • Handle: RePEc:she:wpaper:2012001

    Download full text from publisher

    File URL:
    File Function: First version, 2012
    Download Restriction: no

    References listed on IDEAS

    1. Edward S. Knotek & II, 2007. "How useful is Okun's law?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-103.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Capital Requirement; Stress-test; capital adequacy;

    JEL classification:

    • 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


    Access and download statistics


    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:she:wpaper:2012001. 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: (Dr. Khawaja Mamun). 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.