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Valuating consumer credit portfolios

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  • Piccoli, Pedro

Abstract

This paper proposes a model that associates borrower credit risk with the cash flow method to assess the economic value of a consumer credit portfolio. A Monte Carlo simulation applying the method to an illustrative loan reveals that the lending standards of the institution, captured in the model by the expected and unexpected losses of the contract according to Basel II Internal Rating-Based Approach, is a key driver of the portfolio's intrinsic value, lending support to the evidence that a bank's credit policy and a bank's valuation are associated.

Suggested Citation

  • Piccoli, Pedro, 2022. "Valuating consumer credit portfolios," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(3).
    • Handle: RePEc:eee:lajcba:v:3:y:2022:i:3:s2666143822000217
    DOI: 10.1016/j.latcb.2022.100067
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    References listed on IDEAS

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    More about this item

    Keywords

    Loan valuation; Bank valuation; Credit risk; Loan losses;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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