Expected credit loss modeling with macroeconomic forecasts
Mdaka, Ntshuxeko Charity
Thepotentialthatacounterpartywilldefaultontheircontractualobligationsisknownas credit risk. Credit risk plays a crucial role in the banking industry, as the primary role of banks is to give out loans. Thus credit risk evaluation, which is also inﬂuenced by the macroeconomicenvironment,isundoubtedlyoneofthemostimportantactivitiesneeded to be carried out by banks. In this thesis we explore three fundamental parameters used in credit risk management and analysis which are namely, probability of default (PD), loss given default (LGD) and exposure at default (EAD). Focusing speciﬁcally on PD, we want to estimate these credit risk parameters throughout the lifetime of a loan under the newly adopted IFRS (InternationalFinancialReportingStandards)9accountingstandard,whilstincorporating macroeconomic factors. In other words we infer a PD term structure curve, which is a major input, into the modelling of credit risk with inclusion of macroeconomic forecasts that are relevant.
Programme in Computational And Applied Mathematics, School of Computer Science and Applied Mathematics, University of the Witwatersrand, Johannesburg February 2019