An empirical approach using a market-based credit risk management model

• Main Authors: Cherng,Jeng-Hwa, 程正華
• Other Authors: Kuo,Chau-Jung
• Format: Others
• Language: zh-TW
• Published: 2006
• Online Access: http://ndltd.ncl.edu.tw/handle/26497925120807581232

碩士 === 輔仁大學 === 金融研究所 === 94 === The New Basel Capital Accord will be implemented step by step in the year 2007.To correspond to the basic ideal of such accord as well as to adapt to the Three Pillars concept, it is a very crucial issue for domestic banks in Taiwan to develop an applicable credit risk model to make good risk management and to increase the portfolio investment efficiency. This paper applies a market-based risk neutral model which signifies basic concept and regulations of the New Accord. Using such approach, all estimates will be endogenously forecast. For instance, it can assess risk, probability of default, loss given default, and exposure at default, just to name a few. Due to different loan interest, term structures, and ways to take down loans, banks face various degrees of risk premium. Such approach can help banks quantify risk and thus estimate if risk premium is reasonable before price is determined. By calculating the minimum probability of default, local banks can then establish internal evaluation, regulate credit policies, and authorize management. Empirical evidence shows that as recovery rate rises, average credit risk in premium declines in a rapid pace. Under the condition that everything being equal, mid-term and long-term average credit risks are higher than their short-term counterparts due to future uncertainties. Therefore, to competitiveness, banks can offer relatively low price differentiation to those customers of short-term loans and with more secure guarantee. In addition, as recovery rate increase, average probability of default of loans has a rising tendency; in other words, probability of default that banks can undertake also goes up. However, when recovery rate rises, expected losses of loans drop; in other words, when protection goes up, expected losses of bad debts go down. In conclusion if guarantee is assessed in a reasonable manner or if respective clauses need to be regularly revised in response to market value.