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

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 struc...

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Autores principales:	Douw Gerbrand Breed, Niel van Jaarsveld, Carsten Gerken, Tanja Verster, Helgard Raubenheimer
Formato:	article
Lenguaje:	EN
Publicado:	MDPI AG 2021
Materias:	probability of default point in time IFRS 9 expected credit loss Insurance HG8011-9999
Acceso en línea:	https://doaj.org/article/691ef2f6d6d84d608ad13459a11f9993
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spelling	oai:doaj.org-article:691ef2f6d6d84d608ad13459a11f99932021-11-25T18:56:14ZDevelopment of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study10.3390/risks91102082227-9091https://doaj.org/article/691ef2f6d6d84d608ad13459a11f99932021-11-01T00:00:00Zhttps://www.mdpi.com/2227-9091/9/11/208https://doaj.org/toc/2227-9091A 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.Douw Gerbrand BreedNiel van JaarsveldCarsten GerkenTanja VersterHelgard RaubenheimerMDPI AGarticleprobability of defaultpoint in timeIFRS 9expected credit lossInsuranceHG8011-9999ENRisks, Vol 9, Iss 208, p 208 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	probability of default point in time IFRS 9 expected credit loss Insurance HG8011-9999
spellingShingle	probability of default point in time IFRS 9 expected credit loss Insurance HG8011-9999 Douw Gerbrand Breed Niel van Jaarsveld Carsten Gerken Tanja Verster Helgard Raubenheimer Development of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study
description	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.
format	article
author	Douw Gerbrand Breed Niel van Jaarsveld Carsten Gerken Tanja Verster Helgard Raubenheimer
author_facet	Douw Gerbrand Breed Niel van Jaarsveld Carsten Gerken Tanja Verster Helgard Raubenheimer
author_sort	Douw Gerbrand Breed
title	Development of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study
title_short	Development of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study
title_full	Development of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study
title_fullStr	Development of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study
title_full_unstemmed	Development of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study
title_sort	development of an impairment point in time probability of default model for revolving retail credit products: south african case study
publisher	MDPI AG
publishDate	2021
url	https://doaj.org/article/691ef2f6d6d84d608ad13459a11f9993
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Development of an Impairment Point in Time Probability of Default Model for Revolving Retail Credit Products: South African Case Study

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