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 Communications Commission (FCC) considers its majority vote to dismantle net neutrality rules.

John Fourier

2017-12-13 06:39:00 Wednesday ET

The Federal Communications Commission (FCC) considers its majority vote to dismantle net neutrality rules.

The Federal Communications Commission (FCC) has decided its majority vote to dismantle rules and regulations of most Internet service providers (ISPs) that

+See More

Senator Elizabeth Warren proposes breaking up key tech titans such as Facebook, Apple, Microsoft, Google, and Amazon (FAMGA).

Becky Berkman

2019-03-21 12:33:00 Thursday ET

Senator Elizabeth Warren proposes breaking up key tech titans such as Facebook, Apple, Microsoft, Google, and Amazon (FAMGA).

Senator Elizabeth Warren proposes breaking up key tech titans such as Facebook, Apple, Microsoft, Google, and Amazon (FAMGA). These tech titans have become

+See More

President Trump supports a bipartisan bill or the Foreign Investment Risk Review Modernization Act.

Charlene Vos

2018-07-21 13:35:00 Saturday ET

President Trump supports a bipartisan bill or the Foreign Investment Risk Review Modernization Act.

President Trump supports a bipartisan bill or the Foreign Investment Risk Review Modernization Act (FIRRMA), which effectively broadens the jurisdiction of

+See More

The Trump administration teams up with western allies to bar HuaWei and other Chinese tech firms.

Daisy Harvey

2019-02-02 11:36:00 Saturday ET

The Trump administration teams up with western allies to bar HuaWei and other Chinese tech firms.

The Trump administration teams up with western allies to bar HuaWei and other Chinese tech firms from building the 5G high-speed infrastructure due to natio

+See More

President Trump's current trade policies appear like the Reagan administration's protectionist trade policies back in the 1980s.

Apple Boston

2018-07-03 11:42:00 Tuesday ET

President Trump's current trade policies appear like the Reagan administration's protectionist trade policies back in the 1980s.

President Trump's current trade policies appear like the Reagan administration's protectionist trade policies back in the 1980s. In comparison to th

+See More

Stock Synopsis: With a new Python program, we use, adapt, apply, and leverage each of the mainstream Gemini Gen AI models to conduct this comprehensive fundamental analysis of Intuit (U.S. stock symbol: $INTU).

Dan Rochefort

2025-10-12 13:32:00 Sunday ET

Stock Synopsis: With a new Python program, we use, adapt, apply, and leverage each of the mainstream Gemini Gen AI models to conduct this comprehensive fundamental analysis of Intuit (U.S. stock symbol: $INTU).

Stock Synopsis: With a new Python program, we use, adapt, apply, and leverage each of the mainstream Gemini Gen AI models to conduct this comprehensive fund

+See More