An Exposure at Default Model for Contingent Credit Line

27 Pages Posted: 5 Apr 2010 Last revised: 5 May 2010

See all articles by Pinaki Bag

Pinaki Bag

Credit Risk Management

Michael Jacobs

Accenture Consulting

Date Written: May 5, 2010

Abstract

In-spite of the large volume of Contingent Credit Lines (CCL) in all commercial banks. paucity of Exposure at Default (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. This current paper is an attempt to build an easy to implement, pragmatic and parsimonious yet accurate model to determine the exposure distribution of a CCL portfolio. Each of the credit lines in a portfolio is modeled as a portfolio of a large number of option instruments which can be exercised by the borrower, determining the level of usage. Using an algorithm similar to the basic CreditRisk and Fourier Transforms we arrive at a portfolio level probability distribution of usage. We perform a simulation experiment in which we illustrate the convolution of two portfolio segments to derive an EAD distribution.

Keywords: EAD, Basel II, Credit Risk, Contingent credit line (CCL),Usage

JEL Classification: G20, G21, C13

Suggested Citation

Bag, Pinaki and Jacobs, Michael, An Exposure at Default Model for Contingent Credit Line (May 5, 2010). Available at SSRN: https://ssrn.com/abstract=1581242 or http://dx.doi.org/10.2139/ssrn.1581242

Pinaki Bag (Contact Author)

Credit Risk Management ( email )

Matrix Center, Office 201
11 Ioniou Politias Street
Larnaca, Larnaca 6057
Cyprus

Michael Jacobs

Accenture Consulting ( email )

1345 Avenue of the Americas
New York, NY 10105
United States
9173242098 (Phone)

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