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.
2018-01-10 08:40:00 Wednesday ET

President Trump considers imposing retaliatory economic sanctions on Chinese products and services in direct response to China's theft and infringement
2019-08-10 21:44:00 Saturday ET

McKinsey Global Institute analyzes 315 U.S. cities and 3,000 counties in terms of how tech automation affects their workers in the next 5 to 10 years. This
2019-05-13 12:38:00 Monday ET

Brent crude oil prices spike to $70-$75 per barrel after the Trump administration stops waiving economic sanctions on Iranian oil exports. U.S. State Secret
2026-07-01 11:29:00 Wednesday ET

In recent years, higher American economic growth has been impressive both by historical standards and in comparison to the rest of the world. American excep
2019-07-05 09:32:00 Friday ET

Warwick macroeconomic expert Roger Farmer proposes paying for social welfare programs with no tax hikes. The U.S. government pension and Medicare liabilitie
2019-10-27 17:37:00 Sunday ET

International climate change can cause an adverse impact on long-term real GDP economic growth. USC climate change economist Hashem Pesaran and his co-autho