Purpose – The purpose of this paper is to build an easy to implement, pragmatic and parsimonious yet accurate model to determine an exposure at default (EAD) distribution for CCL (contingent credit lines) portfolios. Design/methodology/approach – Using an algorithm similar to the basic...

In recent years, the question of how to prevent another crippling re-cession has become a prominent one. The answer provided by the Dodd-Frank Act is stress testing, which examines through economic models how banks would react to a bad turn of economic events, such as negative interest rates....

Exposure at Default (EAD) quantification for the large exposures to contingent credit lines (CCLs) is a critical for models of credit risk amongst financial institutions. This includes expected loss calculations for loan provisions, economic credit capital as well as regulatory capital under the...

A challenge in economic capital modeling within financial institutions is developing a coherent approach to model validation. This has been motivated by rapid financial innovation, developments in supervisory standards (Pillar II of the Basel II framework) and the recent financial turmoil. We...

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...

The prices of or spread on credit default swaps (CDS) theoretically represent the pure credit risk of a firm. Callen, Livnat and Segal (2007) note that although the CDS premium is related to credit ratings issued by the rating agencies, rather wide variation in CDS spreads are observed for firms...