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Approaches to Modelling Exposure at Default for the Entire Life of the Asset

Author

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  • Alfiya F. Vasilyeva

    (HSE University, Moscow 101000, Russian Federation)

Abstract

This paper is devoted to developing an optimal model for assessing the default requirement (EAD) of assets over the entire life of a financial instrument in accordance with the requirements of IFRS 9 “Financial instruments”. The EAD for the whole life of a financial instrument is a set of estimates of EAD values from the first to the last year during the life of the asset. Two models are used for evaluating EAD under agreements with a set limit (for example, a credit line, overdraft) and under guarantees and letters of credit: the EAD model for balance sheet financial instruments (applied to the balance sheet part) and the credit conversion factor (CCF) model (applied to the off-balance sheet part). The approach to CCF modeling is described in the second part of the study. This model was developed based on a real bank portfolio of assets, using data which were collected at the beginning of the 2017. These days the topic of the paper is highly acute for both commercial banks that has experienced the problem of improving credit risk assessment models due to the requirements that have appeared to them owing to the introduction of IFRS 9 since January 1, 2018, and regulatory authorities as well, etc.

Suggested Citation

  • Alfiya F. Vasilyeva, 2021. "Approaches to Modelling Exposure at Default for the Entire Life of the Asset," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 4, pages 91-109, August.
    • Handle: RePEc:fru:finjrn:210407:p:91-109
    DOI: 10.31107/2075-1990-2021-4-91-109
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    More about this item

    Keywords

    IFRS 9; exposure at default; EAD; CCF; expected credit losses; credit risk assessment;
    All these keywords.

    JEL classification:

    • B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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