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Loss Rate Forecasting Framework Based on Macroeconomic Changes: Application to US Credit Card Industry [article]

Sajjad Taghiyeh, David C Lengacher, Robert B Handfield
2020 arXiv   pre-print
In this paper, we propose an expert system for loss forecasting in the credit card industry using macroeconomic indicators.  ...  The proposed expert system gives a holistic view of the economy to the practitioners in the credit card industry and helps them to see the impact of different macroeconomic conditions on their future loss  ...  Conclusions In this paper, we have proposed a machine learning based loss forecasting framework for the credit card industry using macroeconomic indicators.  ... 
arXiv:2006.07911v1 fatcat:dyllikhcgjbm7icfxe5dh2u4c4

Changes in Bank Lending Standards and the Macroeconomy

John C. Driscoll, Egon Zakrajsek, Mary Beth Chosak, William F. Bassett
2012 Social Science Research Network  
Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific  ...  Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads  ...  A variant of the benchmark econometric model can be used to adjust the reported changes in standards on commercial and industrial (C&I) loans for the macroeconomic and bank-specific factors that can also  ... 
doi:10.2139/ssrn.2055221 fatcat:4skf7luwardgjpvb5cqotuqr6u

Forecasting and stress testing the risk-based capital requirements for revolving retail exposures

Kwamie Dunbar
2012 Journal of Banking Regulation  
This method relies on the simulation of PD distributions via changes in selected macroeconomic variables and the card holder's debt to income ratio (DTIR).  ...  This paper presents a tractable and empirically sound technique for generating stressed probabilities of default (PDs) which are then used to derive loss rates for the provisioning of a bank's risk-based  ...  Such models that are used to determine whether an applicant should be granted credit are based on data collected at the time of application that then remain fixed.  ... 
doi:10.1057/jbr.2012.5 fatcat:prj6lmaoxbdmrib64e7ad72noa

Changes in Bank Lending Standards and the Macroeconomy

William F. Bassett, Mary Beth Chosak, John C. Driscoll, Egon Zakrajsek
2010 Social Science Research Network  
Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific  ...  Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads  ...  A variant of the benchmark econometric model can be used to adjust the reported changes in standards on commercial and industrial (C&I) loans for the macroeconomic and bank-specific factors that can also  ... 
doi:10.2139/ssrn.1758832 fatcat:ibviblx5zvejpkvihaf5q5u6ke

Forecasting Retail Portfolio Credit Risk

DANIEL RÖSCH, HARALD SCHEULE
2004 The Journal of Risk Finance  
We argue that taking lagged macroeconomic risk factors into account may lead to more accurate loss forecasts and may considerably reduce economic capital.  ...  Due to limited empirical evidence on their magnitude, in particular for retail credit risk, the Basel Committee sets standard specifications for the asset correlations.  ...  about here---] The macroeconomic variables change of consumer prices in % (CPI), deposit interest rate in % (DIR), growth in gross domestic product in % (GDP) and change in the industrial production in  ... 
doi:10.1108/eb022983 fatcat:bp6ha6nnxvgy7nobqplhznp33e

Stress testing credit card portfolios: an application in South Africa

Yixin Seah, Mee Chi So, Lyn C Thomas
2014 Journal of the Operational Research Society  
The second approach was a set of vintage level models which highlighted the months-on-book effect on credit losses. A case study using the models was described using South African credit card data.  ...  Motivated by a real problem, this study aims to develop models to conduct stress testing on credit card portfolios.  ...  The authors would also like to thanks all three anonymous referees who provide insightful recommendations and suggestions. Any mistakes are solely ours.  ... 
doi:10.1057/jors.2013.75 fatcat:7ui5jnl2dzfwnjbrbg2p4ydsmu

A Holistic Model Validation Framework for Current Expected Credit Loss (CECL) Model Development and Implementation

Michael Jacobs
2020 International Journal of Financial Studies  
The Current Expected Credit Loss (CECL) revised accounting standard for credit loss provisioning is the most important change to United States (US) accounting standards in recent history.  ...  As an example of CECL model development validation, we investigate a modeling framework that we believe to be very close to that being contemplated by institutions, which projects loan losses using time-series  ...  One is the attribution of changes to the ALLL (e.g., scenarios, portfolio composition, credit model changes, etc.).  ... 
doi:10.3390/ijfs8020027 fatcat:2kntb75zibehfeg7txydxld42a

Updated Primer on the Forward-Looking Analysis of Risk Events (FLARE) Model: A Top-Down Stress Test Model

Sergio Correia, Board of Governors of the Federal Reserve System, Matthew P. Seay, Cindy M. Vojtech, Board of Governors of the Federal Reserve System, Board of Governors of the Federal Reserve System
2022 Finance and Economics Discussion Series  
The Forward-Looking Analysis of Risk Events (FLARE) model is one such tool.  ...  This technical note describes the FLARE model, which is a top-down model that helps assess how well the banking system is positioned to weather exogenous macroeconomic shocks.  ...  Similar to the refinements implemented for credit card NCOs, our first priority is to focus on incorporating risk measures that add to the macro sensitivity of the model and inform loss estimates.  ... 
doi:10.17016/feds.2022.009 fatcat:xexha2ik65hfrhe3rs2mfiux34

The Probability of Default Under IFRS 9: Multi-period Estimation and Macroeconomic Forecast

Tomáš Vaněk, David Hampel
2017 Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis  
The proposed framework can be used especially when calculating lifetime expected credit losses under IFRS 9.  ...  The concept is based on Markov models, the estimated economic adjustment coefficient and the official economic forecasts of the Czech National Bank.  ...  The second popular approach is based on the survival analysis framework. For example Duffie et al. (2007) Bellotti, Crook (2009) to model default probabilities of credit card accounts.  ... 
doi:10.11118/actaun201765020759 fatcat:7fgextp4nbf7ldwxszk355atya

Forecasting and stress testing credit card default using dynamic models

Tony Bellotti, Jonathan Crook
2013 International Journal of Forecasting  
Typically models of credit card default are built on static data, often collected at time of application.  ...  We consider alternative models that also include behavioural data about credit card holders and macroeconomic conditions across the credit card lifetime, using a discrete survival analysis framework.  ...  Such models are used to determine whether an applicant should be granted credit based on data collected at time of application that then remain fixed.  ... 
doi:10.1016/j.ijforecast.2013.04.003 fatcat:x6x6lococzd2xfa4iq3ohkuaz4

Endogenous Derivation and Forecast of Lifetime PDs

Volodymyr Perederiy
2015 Social Science Research Network  
The presented forward PDs can be used for the derivation of lifetime credit losses required by the new accounting standard IFRS 9.  ...  The paper also shows how the approach can be naturally extended to low-default portfolios with volatile default rates, using Bayesian methodology.  ...  One or the most important innovations of IFRS 9, compared to previous regulation IAS 39, lies in the application of the expected lifetime credit losses for accounting of a large class of risky credit exposures  ... 
doi:10.2139/ssrn.2624761 fatcat:cpu4diuiofdbdifmg2uhquyqem

Stress-testing Financial Systems: An Overview of Current Methodologies

Marco Sorge
2004 Social Science Research Network  
Further research in this area might also focus on how to use macro stress-testing techniques as an operational tool to incorporate financial stability considerations into monetary policy decision-making  ...  However, a number of methodological challenges still remain concerning the correlation of market and credit risks over time and across institutions, the limited time horizon generally used for the analysis  ...  rates and the proportion of credit card debt in arrears for the household sector.  ... 
doi:10.2139/ssrn.759585 fatcat:c2wqfvggdvglbmok5phtbjrjoy

The Capital and Loss Assessment under Stress Scenarios (CLASS) Model

Beverly Hirtle, Anna Kovner, James I. Vickery, Meru Bhanot
2014 Social Science Research Network  
We use this framework to calculate a projected industry capital gap relative to a target ratio at different points in time under a common stressful macroeconomic scenario.  ...  The model is based on simple econometric models estimated using public data and also on assumptions about loan loss provisioning, taxes, asset growth, and other factors.  ...  This is necessary because interest margins vary significantly across firms (e.g. margins are higher for firms with a high concentration of credit card loans, due to the high interest rates on credit card  ... 
doi:10.2139/ssrn.2394109 fatcat:w7xukkwufrevzoc4lba4n77boq

Transformation of Investment and Savings Behavior of High-Income Groups during the Crisis
Трансформация инвестиционно-сберегательного поведения высокодоходных групп населения в период кризиса

Olga Aleksandrova, Aziza Yarasheva
2016 Economic and Social Changes: Facts, Trends, Forecast  
insurance; reflects the experience of borrowing and the attitude to different credit products.  ...  It analyses well-to-do households' approaches to the choice of a bank and a type of deposit and their willingness to use other ways of investing, including participation in the system of voluntary pension  ...  Based on my own experience -I am one of those who received education in 1992 and watched the change in the situation several times: from the card system to the free development of wild capitalism, when  ... 
doi:10.15838/esc/2016.1.43.8 fatcat:xcg272moajd7tajcajwriqaxja

A Multifactor Approach for Systematic Default and Recovery Risk

Daniel Rösch, Harald Scheule
2005 Journal of Fixed Income  
Applying this model, risk parameters can be forecast using systematic and idiosyncratic risk factors and their implied correlations.  ...  The theoretical framework is accompanied by an empirical analysis in which a negative correlation between defaults and recoveries over the business cycle is observed.  ...  capital is calculated based on the forecast default probabilities and forecast recovery rates.  ... 
doi:10.3905/jfi.2005.591610 fatcat:jq6vgylyujaqhnci2h5cuw2qyy
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