scholarly journals Development of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study

Risks ◽  
2021 ◽  
Vol 9 (11) ◽  
pp. 208
Author(s):  
Douw Gerbrand Breed ◽  
Niel van Jaarsveld ◽  
Carsten Gerken ◽  
Tanja Verster ◽  
Helgard Raubenheimer
Keyword(s):  
South African ◽  
Term Structure ◽  
Default Risk ◽  
Lorenz Curve ◽  
Term Structures ◽  
Risk Characteristics ◽  
Retail Credit ◽  
Credit Scores ◽  
Ifrs 9 ◽  
The Lorenz Curve

A new methodology to derive IFRS 9 PiT PDs is proposed. The methodology first derives a PiT term structure with accompanying segmented term structures. Secondly, the calibration of credit scores using the Lorenz curve approach is used to create account-specific PD term structures. The PiT term structures are derived by using empirical information based on the most recent default information and account risk characteristics prior to default. Different PiT PD term structures are developed to capture the structurally different default risk patterns for different pools of accounts using segmentation. To quantify what a materially different term structure constitutes, three tests are proposed. Account specific PiT PDs are derived through the Lorenz curve calibration using the latest default experience and credit scores. The proposed methodology is illustrated on an actual dataset, using a revolving retail credit portfolio from a South African bank. The main advantages of the proposed methodology include the use of well-understood methods (e.g., Lorenz curve calibration, scorecards, term structure modelling) in the banking industry. Further, the inclusion of re-default events in the proposed IFRS 9 PD methodology will simplify the development of the accompanying IFRS 9 LGD model due to the reduced complexity for the modelling of cure cases. Moreover, attrition effects are naturally included in the PD term structures and no longer require a separate model. Lastly, the PD term structure is based on months since observation, and therefore the arrears cycle could be investigated as a possible segmentation.

How to estimate expected credit losses – ECL – for provisioning under IFRS 9

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mariya Gubareva
Keyword(s):  
Risk Premium ◽  
Default Risk ◽  
Financial Regulation ◽  
Credit Default Swap ◽  
High Yield ◽  
Expected Loss ◽  
Content Type ◽  
Term Structures ◽  
Ifrs 9 ◽  
Investment Grade

PurposeThis paper provides an objective approach based on available market information capable of reducing subjectivity, inherently present in the process of expected loss provisioning under the IFRS 9.Design/methodology/approachThis paper develops the two-step methodology. Calibrating the Credit Default Swap (CDS)-implied default probabilities to the through-the-cycle default frequencies provides average weights of default component in the spread for each forward term. Then, the impairment provisions are calculated for a sample of investment grade and high yield obligors by distilling their pure default-risk term-structures from the respective term-structures of spreads. This research demonstrates how to estimate credit impairment allowances compliant with IFRS 9 framework.FindingsThis study finds that for both investment grade and high yield exposures, the weights of default component in the credit spreads always remain inferior to 33%. The research's outcomes contrast with several previous results stating that the default risk premium accounts at least for 40% of CDS spreads. The proposed methodology is applied to calculate IFRS 9 compliant provisions for a sample of investment grade and high yield obligors.Research limitations/implicationsMany issuers are not covered by individual Bloomberg valuation curves. However, the way to overcome this limitation is proposed.Practical implicationsThe proposed approach offers a clue for a better alignment of accounting practices, financial regulation and credit risk management, using expected loss metrics across diverse silos inside organizations. It encourages adopting the proposed methodology, illustrating its application to a set of bond exposures.Originality/valueNo previous research addresses impairment provisioning employing Bloomberg valuation curves. The study fills this gap.

Rating Agency Adjustments to GAAP Financial Statements and Their Effect on Ratings and Credit Spreads

2014 ◽  
Vol 90 (2) ◽  
pp. 641-674 ◽  
Author(s):  
Pepa Kraft
Keyword(s):  
Default Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Balance Sheet ◽  
Financial Statements ◽  
Financial Statement ◽  
Credit Spread ◽  
Credit Spreads ◽  
Term Structures ◽  
Interest Expense

ABSTRACT I examine a dataset of both quantitative (hard) adjustments to firms' reported U.S. GAAP financial statement numbers and qualitative (soft) adjustments to firms' credit ratings that Moody's develops and uses in its credit rating process. I first document differences between firms' reported and Moody's adjusted numbers that are both large and frequent across firms. For example, primarily because of upward adjustments to interest expense and debt attributable to firms' off-balance sheet debt, on average, adjusted coverage (cash flow-to-debt) ratios are 27 percent (8 percent) lower and adjusted leverage ratios are 70 percent higher than the corresponding U.S. GAAP ratios. I then find that Moody's hard and soft rating adjustments are associated with significantly higher credit spreads and flatter credit spread term structures. Overall, the results indicate that Moody's quantitative adjustments to financial statement numbers and qualitative adjustments to credit ratings enable it to better capture default risk, consistent with it effectively processing both hard and soft information.

The Contest for Olympic Success as a Public Good

2013 ◽  
Author(s):  
Loek Groot
Keyword(s):  
Lorenz Curve ◽  
Gini Index ◽  
World Population ◽  
Level Playing Field ◽  
Actual Distribution ◽  
Playing Field ◽  
Inequality Measures ◽  
The Rich ◽  
The Lorenz Curve ◽  
Rich Countries

In this study it is demonstrated that standard income inequality measures, such as the Lorenz curve and the Gini index, can successfully be applied to the distribution of Olympic success. Olympic success is distributed very unevenly, with the rich countries capturing a disproportionately higher share compared to their world population share, which suggests that the Olympic Games do not provide a level playing field. The actual distribution of Olympic success is compared with alternative hypothetical distributions, among which are chosen the distribution according to population shares, the welfare optimal distribution under the assumption of zero government expenditures, and the non-cooperating Nash-Cournot distribution. By way of conclusion, a device is proposed to make the distribution of Olympic success more equitable.

Functional Form for Estimating the Lorenz Curve

Econometrica ◽  
1984 ◽  
Vol 52 (5) ◽  
pp. 1313 ◽  
Author(s):  
Manash Ranjan Gupta
Keyword(s):  
Lorenz Curve ◽  
Functional Form ◽  
The Lorenz Curve

scholarly journals Quantile versions of the Lorenz curve

2016 ◽  
Vol 10 (2) ◽  
pp. 1896-1926 ◽  
Author(s):  
Luke A. Prendergast ◽  
Robert G. Staudte
Keyword(s):  
Lorenz Curve ◽  
The Lorenz Curve

scholarly journals Risk transfer beyond reinsurance: the added value of CAT bonds

2021 ◽  
Author(s):  
Tobias Götze ◽  
Marc Gürtler
Keyword(s):  
Risk Management ◽  
Default Risk ◽  
Management Strategies ◽  
Added Value ◽  
Insurance Companies ◽  
Data Set ◽  
Basis Risk ◽  
Cat Bonds ◽  
Risk Characteristics ◽  
Risk Management Strategies

AbstractReinsurance and CAT bonds are two alternative risk management instruments used by insurance companies. Insurers should be indifferent between the two instruments in a perfect capital market. However, the theoretical literature suggests that insured risk characteristics and market imperfections may influence the effectiveness and efficiency of reinsurance relative to CAT bonds. CAT bonds may add value to insurers’ risk management strategies and may therefore substitute for reinsurance. Our study is the first to empirically analyse if and under what circumstances CAT bonds can substitute for traditional reinsurance. Our analysis of a comprehensive data set comprising U.S. P&C insurers’ financial statements and CAT bond use shows that insurance companies’ choice of risk management instruments is not arbitrary. We find that the added value of CAT bonds mainly stems from non-indemnity bonds and reveal that (non-indemnity) CAT bonds are valuable under high reinsurer default risk, low basis risk and in high-risk layers.

The Interpolation of the Lorenz Curve and Gini Index from Grouped Data

Econometrica ◽  
1976 ◽  
Vol 44 (3) ◽  
pp. 479 ◽  
Author(s):  
Joseph L. Gastwirth ◽  
Marcia Glauberman
Keyword(s):  
Lorenz Curve ◽  
Gini Index ◽  
Grouped Data ◽  
The Lorenz Curve
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