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Consumer Credit ModelsPricing, Profit and Portfolios$
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Lyn C. Thomas

Print publication date: 2009

Print ISBN-13: 9780199232130

Published to Oxford Scholarship Online: May 2009

DOI: 10.1093/acprof:oso/9780199232130.001.1

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Portfolio credit risk and the Basel Accord

Portfolio credit risk and the Basel Accord

Chapter:
(p.278) 5 Portfolio credit risk and the Basel Accord
Source:
Consumer Credit Models
Author(s):

Lyn C. Thomas

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199232130.003.0005

The previous chapters in the book have concentrated on modelling decisions and uncertainties on one consumer loan. This chapter concentrates on models related to portfolios of such loans. In particular it looks at the economic capital and regulatory capital needed to cope with the credit risk in a portfolio of consumer loans. It concentrates on how the Basel Capital Accord, in place since 2007, impacts on credit scoring and is in turn dependent on credit scoring. The chapter reviews what the Accord requires and how the minimum capital requirement formula can be derived. It then looks at the impact it has on credit scoring with the increased importance in validating the prediction probabilities of the default scores, and the need to calculate long run average probability of default rates from credit scores. Models are developed to show how the Basel regulations will change the optimal cut-off scores in the application process. The various portfolio credit risk models for corporate loans and whether there are equivalent models appropriate for assessing the credit risk for portfolios of consumer loans are discussed. These are useful for stress testing as required in the Basel Accord.

Keywords:   Basel Capital Accord, regulatory capital, economic capital, stress testing, credit scoring, default rates, consumer loans

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