Recent regulation in credit risk management: A statistical framework

Artikel

A recently introduced accounting standard, namely the International Financial Reporting Standard 9, requires banks to build provisions based on forward-looking expected loss models. When there is a significant increase in credit risk of a loan, additional provisions must be charged to the income statement. Banks need to set for each loan a threshold defining what such a significant increase in credit risk constitutes. A low threshold allows banks to recognize credit risk early, but leads to income volatility. We introduce a statistical framework to model this trade-off between early recognition of credit risk and avoidance of excessive income volatility. We analyze the resulting optimization problem for different models, relate it to the banking stress test of the European Union, and illustrate it using default data by Standard and Poor's.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Risks ; ISSN: 2227-9091 ; Volume: 7 ; Year: 2019 ; Issue: 2 ; Pages: 1-19 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft
• Subject: credit risk ; risk modelling ; IFRS 9 ; expected credit loss ; early recognition ; income volatility

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ewanchuk, Logan ; Frei, Christoph
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2019

Further information

• DOI: doi:10.3390/risks7020040
• Handle: http://hdl.handle.net/10419/257878
• Last update: 10.03.2025, 11:45 AM CET