Home > Library > Algorithmic credit portfolio segmentation
Author Andy Yeh Alpha
This research article proposes a new algorithmic model for credit portfolio segmentation.
Description:
Under the new Basel bank capital framework, each bank must group its retail exposures into multiple segments with homogeneous risk characteristics. The U.S. regulatory agencies believe that each bank may use its internal risk models for the loan-level risk parameter estimates such as probability of default (PD) and loss given default (LGD) to group individual exposures into the resultant segments with homogeneous risk attributes. In stark contrast to the conventional decision-tree method, we propose a new algorithmic technique for retail consumer loan portfolio segmentation. This new technique identifies the optimal number of segments, sorts the individual loan exposures into the various segments, and then leads to the minimal degree of risk heterogeneity in comparison to the baseline equal-bin and quantile-bin schemes. Furthermore, we analyze the Monte Carlo implicit asset correlation values for the retail loan segments over time to help assess the implications for bank capital measurement. The best-fit method for retail credit portfolio segmentation results in some capital relief that serves as an economic incentive for the bank to invest in this alternative segmentation. This positive outcome accords with the core principle of statistical conservatism that the financial econometrician enshrines in the Basel regulatory requirements for bank capital measurement.
2019-03-27 11:28:00 Wednesday ET

OECD cuts the global economic growth forecast from 3.5% to 3.3% for the current fiscal year 2019-2020. The global economy suffers from economic protraction
2019-09-23 12:25:00 Monday ET

Volcker, Greenspan, Bernanke, and Yellen contribute to a Wall Street Journal op-ed on monetary policy independence. These former Federal Reserve chiefs unit
2018-11-13 12:30:00 Tuesday ET

President Trump promises a great trade deal with China as Americans mull over mid-term elections. President Trump wants to reach a trade accord with Chinese
2019-12-10 09:30:00 Tuesday ET

Federal Reserve institutes the third interest rate cut with a rare pause signal. The Federal Open Market Committee (FOMC) reduces the benchmark interest rat
2024-02-05 11:26:00 Monday ET

China poses new economic, technological, and military threats to the U.S. and many western allies. In the U.S. government assessment, China poses new eco
2019-08-08 09:35:00 Thursday ET

Kobe Bryant and several other star athletes have been smart savvy investors. In collaboration with former Web.com CEO Jeff Stibel, the NBA champion invests