MODELING LIFETIME EXPECTED CREDIT LOSSES ON BANK LOANS

2021 ◽  
Author(s):  
THAMAYANTHI CHELLATHURAI
Keyword(s):  
Term Structure ◽  
Financial Institution ◽  
Bank Loans ◽  
Probability Of Default ◽  
Short Term ◽  
Multiple Points ◽  
Loss Given Default ◽  
Black Scholes ◽  
Debt Repayment ◽  
Credit Losses

The guidelines of various Accounting Standards require every financial institution to measure lifetime expected credit losses (LECLs) on every instrument, and to determine at each reporting date if there has been a significant increase in credit risk since its inception. This paper models LECLs on bank loans given to a firm that has promised to repay debt at multiple points over the lifetime of the contract. The LECL can be written as a sum of ECLs (estimated at reporting date) incurred at debt repayment times. The ECL at any debt repayment time can be written as a product of the probability of default (PD), the expected value of loss given default and the exposure at default. We derive a stochastic dynamical equation for the value of the firm’s asset by incorporating the dynamics of the factors. Also, we show how the LECL and the term structure of the PD can be estimated by solving a Black–Scholes–Merton like partial differential equation. As an illustration, we present the numerical results for the various credit loss indicators of a fictitious firm when the dynamics of the short-term interest rate is characterized by a Cox–Ingersoll–Ross mean-reverting process.

scholarly journals Estimating Loss Given Default from CDS under Weak Identification*

2020 ◽  
Author(s):  
Lily Y Liu
Keyword(s):  
Time Series ◽  
Term Structure ◽  
Risk Premia ◽  
Reduced Form ◽  
Probability Of Default ◽  
Weak Identification ◽  
Loss Given Default ◽  
Default Intensity ◽  
Credit Default ◽  
Identification Strategy

Abstract Existing reduced-form default intensity models that jointly estimate probability of default (PD) and loss given default (LGD) from credit default swaps (CDSs) produce dissimilar results, and there is little guidance on which time series specification to choose. This article develops a model of CDS term structure without parametric time series restrictions for PD and uses weak-identification robust methods to investigate whether separate identification of PD and LGD is still possible. Consistent with intuition about the identification strategy, the model is not globally identified. However, in my empirical application, LGD is precisely estimated for half of the firm-months under study, with resulting values much lower than conventional values. This implies that the risk-neutral PD and the risk premia on PD are underestimated when LGD is set to conventional values.

scholarly journals CANDIDE et la monnaie

2009 ◽  
Vol 52 (1) ◽  
pp. 75-103
Author(s):  
Jean-Pierre Aubry ◽  
Pierre Duguay
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Structural Equations ◽  
Reduced Form ◽  
Real Sector ◽  
Short Term ◽  
The Real ◽  
Structure Equations

Abstract In this paper we deal with the financial sector of CANDIDE 1.1. We are concerned with the determination of the short-term interest rate, the term structure equations, and the channels through which monetary policy influences the real sector. The short-term rate is determined by a straightforward application of Keynesian liquidity preference theory. A serious problem arises from the directly estimated reduced form equation, which implies that the demand for high powered money, but not the demand for actual deposits, is a stable function of income and interest rates. The structural equations imply the opposite. In the term structure equations, allowance is made for the smaller variance of the long-term rates, but insufficient explanation is given for their sharper upward trend. This leads to an overstatement of the significance of the U.S. long-term rate that must perform the explanatory role. Moreover a strong structural hierarchy, by which the long Canada rate wags the industrial rate, is imposed without prior testing. In CANDIDE two channels of monetary influence are recognized: the costs of capital and the availability of credit. They affect the business fixed investment and housing sectors. The potential of the personal consumption sector is not recognized, the wealth and real balance effects are bypassed, the credit availability proxy is incorrect, the interest rate used in the real sector is nominal rather than real, and the specification of the housing sector is dubious.

Value-at-Risk and Expected Shortfall approaches for option premiums and the probability of default estimation based on ARMA models

2021 ◽  
Vol 57 (3) ◽  
pp. 126
Author(s):  
Nikolai Berzon
Keyword(s):  
Time Series ◽  
Option Pricing ◽  
Discrete Time ◽  
Value At Risk ◽  
Probability Of Default ◽  
Pricing Models ◽  
Arma Process ◽  
Underlying Asset ◽  
Black Scholes

The need to address the issue of risk management has given rise to a number of models for estimation the probability of default, as well as a special tool that allows to sell credit risk – a credit default swap (CDS). From the moment it appeared in 1994 until the crisis of 2008, that the CDS market was actively growing, and then sharply contracted. Currently, there is practically no CDS market in emerging economies (including Russia). This article is to improve the existing CDS valuation models by using discrete-time models that allow for more accurate assessment and forecasting of the selected asset dynamics, as well as new option pricing models that take into account the degree of risk acceptance by the option seller. This article is devoted to parametric discrete-time option pricing models that provide more accurate results than the traditional Black-Scholes continuous-time model. Improvement in the quality of assessment is achieved due to three factors: a more detailed consideration of the properties of the time series of the underlying asset (in particular, autocorrelation and heavy tails), the choice of the optimal number of parameters and the use of Value-at-Risk approach. As a result of the study, expressions were obtained for the premiums of European put and call options for a given level of risk under the assumption that the return on the underlying asset follows a stationary ARMA process with normal or Student's errors, as well as an expression for the credit spread under similar assumptions. The simplicity of the ARMA process underlying the model is a compromise between the complexity of model calibration and the quality of describing the dynamics of assets in the stock market. This approach allows to take into account both discreteness in asset pricing and take into account the current structure and the presence of interconnections for the time series of the asset under consideration (as opposed to the Black–Scholes model), which potentially allows better portfolio management in the stock market.

scholarly journals PENYELESAIAN UTANG IMPOR, JU’ALAH DAN SERTIFIKAT BANK INDONESIA SYARIAH (SBIS) PERSPEKTIF FATWA DSN-MUI

2018 ◽  
Vol 2 (2) ◽  
pp. 217-225
Author(s):  
Khozainul Ulum
Keyword(s):  
Financial Institutions ◽  
Commercial Banks ◽  
Financial Institution ◽  
Letter Of Credit ◽  
The Public ◽  
Islamic Financial Institutions ◽  
Monetary Control ◽  
Debt Repayment ◽  
Level Of Risk

Sharia financial Institution is one of the economic supporters of Indonesia. It is evidenced by the number of Islamic financial institutions that have sprung up this year, both sharia bank and non-bank sharia financial institution. It accommodates the aspiration and need of the society. The public is given the widest opportunity to establish a bank based on sharia principles, including convert from commercial banks whose business activities are based on conventional patterns into sharia patterns. The more sharia financial institutions that emerge, the more products offered by Islamic financial institutions to customers with the level of risk that can be overcome. The writing aims to answer the formulation of problem of settlement of import debts, contract of ju’a>lah and Sharia Certificate of Bank Indonesia (SBIS) in perspective of DSN-MUI fatwa. The result of research shows that in the DSN-MUI fatwa, it is explained that the settlement of imported debt or we know as letter of credit (L/C) may use the kafa>lah contract by taking a fee. It is also explained that one of the forms of kafa>lah contract is kafa>lah bi al-ma>l which is the application of kafa>lah contract which guarantees the payment of goods or debt repayment. This guarantee may be provided by the sharia bank to its customers in return for a fee. For the settlement of import debt there are several contracts that can be used, namely the contract of h}iwa>lah bi al-ujrah, waka>lah bi al-ujrah, and kafa>lah bi al-ujrah The Sharia Certificate of Bank Indonesia which used to be wadi>’ah with Wadi>’ah Certificate of Bank Indonesia which is now changed with Sharia Certificate of Bank Indonesia uses ju’a>lah contract. In this contract, Bank Indonesia pays the repayment upon maturity of SBIS with the relevant sharia banking record having performed and achieving the objectives expected by Bank Indonesia. If the sharia banking concerned is not able to achieve the desired objectives or stipulated by Bank Indonesia in terms of monetary control based on sharia principles, the relevant sharia banking will not receive any compensation from Bank Indonesia.

scholarly journals THE ROLE OF FINANCIAL INSTITUTIONS AND SOCIAL SECURITY FOR INDONESIAN HOUSEHOLD OPPORTUNITIES TO OPENS BUSINESSES

2020 ◽  
Vol 6 (2) ◽  
pp. 273
Author(s):  
Eko Fajar Cahyono
Keyword(s):  
Social Security ◽  
Financial Institution ◽  
Negative Relationship ◽  
Bank Loans ◽  
Government Assistance ◽  
National Healthcare ◽  
Logistic Regression Method ◽  
Risk Protection ◽  
Death Care

The purpose of this study was to test Fahim Khan's model. The model states that the existence of government assistance and social security will increase one's chances of becoming entrepreneurs. The model has the argument that government assistance and social security will provide better risk protection for entrepreneurs. By analyzing more than 15.000 sample data from the Indonesian Family Life Survey, this study examines the proposed Fahim Khan model that Islamic economics encourages entrepreneurship with two important factors, financial and funding social security institutions. The results of this study are obtained from the logistic regression method stating that there are influences of social security and financial institution financing on the opportunity to open a business. Furthermore, this study produced several important findings, such as bank loans and social security have an impact to the opportunity for Indonesian household of opening a business. Either partially or simultaneously all independent variables (bank loans, pension security, insurance claims, national healthcare security membership, national accident care security membership, national pension care membership, national death care security membership) have a significant effect on the business. The results show that there are three variables that have a negative relationship with business, namely the national healthcare security membership variable, the national accident care security membership variable and the national pension care security membership variable.

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