Library

Home > Library > Algorithmic credit portfolio segmentation

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.

Blog+More

The Federal Reserve proposes softening the Volcker rule that prevents banks from placing risky bets on securities with deposit finance.

James Campbell

2018-05-27 08:33:00 Sunday ET

The Federal Reserve proposes softening the Volcker rule that prevents banks from placing risky bets on securities with deposit finance.

The Federal Reserve proposes softening the Volcker rule that prevents banks from placing risky bets on securities with deposit finance. As part of the po

+See More

President Xi seeks Chinese congressional approval for abolishing his term limits of strongman rule with better trade deals and economic ties.

Jacob Miramar

2018-03-03 11:37:00 Saturday ET

President Xi seeks Chinese congressional approval for abolishing his term limits of strongman rule with better trade deals and economic ties.

President Xi seeks Chinese congressional approval and constitutional amendment for abolishing his term limits of strongman rule with more favorable trade de

+See More

President Trump criticizes the WTO and proposes indexing capital gains taxes to inflation for U.S. investors.

Charlene Vos

2018-08-29 10:37:00 Wednesday ET

President Trump criticizes the WTO and proposes indexing capital gains taxes to inflation for U.S. investors.

In an exclusive interview with Bloomberg, President Trump criticizes the World Trade Organization (WTO), proposes indexing capital gains taxes to inflation

+See More

Netflix suffers its first major loss of U.S. subscribers due to the recent price hikes.

Rose Prince

2019-08-14 10:31:00 Wednesday ET

Netflix suffers its first major loss of U.S. subscribers due to the recent price hikes.

Netflix suffers its first major loss of U.S. subscribers due to the recent price hikes. The company adds only 2.7 million new subscribers in 2019Q2 in stark

+See More

The Trump administration blames China for egregious currency misalignment.

Olivia London

2018-10-17 12:33:00 Wednesday ET

The Trump administration blames China for egregious currency misalignment.

The Trump administration blames China for egregious currency misalignment, but this criticism cannot confirm *currency manipulation* on the part of the Chin

+See More

Spotify considers directly selling its shares to the retail public with no underwriter involvement.

Rose Prince

2018-01-08 10:37:00 Monday ET

Spotify considers directly selling its shares to the retail public with no underwriter involvement.

Spotify considers directly selling its shares to the retail public with no underwriter involvement. The music-streaming company plans a direct list on NYSE

+See More