Next Article in Journal
Pricing of Longevity Derivatives and Cost of Capital
Next Article in Special Issue
Bank Competition in India: Some New Evidence Using Risk-Adjusted Lerner Index Approach
Previous Article in Journal
Imbalance Market Real Options and the Valuation of Storage in Future Energy Systems
Previous Article in Special Issue
CEO Overconfidence and Shadow-Banking Life Insurer Performance Under Government Purchases of Distressed Assets
Open AccessArticle

Recent Regulation in Credit Risk Management: A Statistical Framework

Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, AB T6G 2G1, Canada
*
Author to whom correspondence should be addressed.
Risks 2019, 7(2), 40; https://doi.org/10.3390/risks7020040
Received: 7 March 2019 / Revised: 8 April 2019 / Accepted: 10 April 2019 / Published: 14 April 2019
(This article belongs to the Special Issue Financial Risks and Regulation)
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. View Full-Text
Keywords: credit risk; risk modelling; IFRS 9; expected credit loss; early recognition; income volatility credit risk; risk modelling; IFRS 9; expected credit loss; early recognition; income volatility
Show Figures

Figure 1

MDPI and ACS Style

Ewanchuk, L.; Frei, C. Recent Regulation in Credit Risk Management: A Statistical Framework. Risks 2019, 7, 40.

Show more citation formats Show less citations formats
Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Article Access Map by Country/Region

1
Back to TopTop