The document presents a model for estimating exposure at default (EAD) for contingent credit lines (CCLs) at the portfolio level. It models each CCL as a portfolio of put options, with the exercise of each put following a Poisson process. The model convolutes the usage distributions of individual obligors, sub-segments, and segments to estimate the portfolio-level EAD distribution. The authors test the model using data from Moody's and find near-Gaussian results. They discuss future work to refine the model and make it more practical for banks to estimate regulatory capital requirements.
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Bag Jacobs Ead Model Ccl Irmc 6 10
1. May 30, 2010 An Exposure at Default Model for Contingent Credit Lines Pinaki Bag Union National Bank, United Arab Emirates Michael Jacobs, Jr. Credit Risk Analysis Division U.S. Office of the Comptroller of the Currency The views expressed herein are those of the authors and do not necessarily represent the views of either Union National Bank, UAE or of the U.S. Office of the Comptroller of the Currency.
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3. Outline 1 Introduction - Motivation 2 Review of the Literature 3 The Model 4 Numerical Experiment 5 Conclusions
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7. What We Did? Portfolio Segments Segment Level Usage Unused Obligor Limits Each CCL as Portfolio of Put Options Basic CreditRisk+ Algorithm Fast Fourier Transform Moody's DRS Database (Current Sample Portfolio) Moody's MURD Database & Compustat (Reference Data for CCF Estimates)
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13. Model Overview Segment Level Usage Obligor Level Unused Limits Each obligor’s CCL is modeled as portfolio of large number of put options to determine usage Similar put size obligors are clubbed under each sub-segment Each sub-segment having similar expected usage are combined to determine segment level usage FFT used to convolute each segment to the overall portfolio usage distribution Individual obligors Sub-segment Segment Portfolio