Journal of Applied Economic Research
ISSN 2712-7435
On the Distribution of Change of Probability of Default of Credit Portfolio of a Commercial Bank
Podluzhnyy S.S.
Abstract
At the moment, the Russian banking system is in a state of transformation: the requirements of the Central Bank of Russia to introduce the standards of the Basel Agreement on Banking Supervision in the Russian banking system require that commercial banks create new instruments for analyzing credit risks. The Basel Agreement on Banking Supervision presupposes the introduction of such risk measures into the banking analysis as the probability of default of the borrower during the year (probability of default). Commercial banks ignore the fact that after accepting credit risk (issuing a loan), the main source of uncertainty is the change in the probability of default of each individual borrower. Thus, the banking practice does not take into account the risk of increasing the probability of default and, as a result, deterioration in the quality of the commercial bank's loan portfolio. In this regard, in this paper it is proposed to consider the change in the probability of default as a random variable and determine the parameters for the distribution of the probability of a default of a commercial bank on practical data. The subject of this study is the change in the probability of default of the bank's loan portfolio. To test the hypothesis of the normality of the distribution, the paper uses the toolkit of mathematical statistics and the method of moments. The hypothesis is verified and confirmed on the basis of historical data in the commercial bank's loan portfolio. The normality of the distribution of the probability of default of the credit portfolio of a commercial bank was assumed and confirmed on practical data. This observation is important from the point of view of managing the loan portfolio of a commercial bank and optimizing banking processes. Knowledge of the type and parameters of the distribution of changes in the likelihood of default of the loan portfolio will allow the commercial bank to react quickly to projected changes in the probability of default of the loan portfolio and to timely rebalance the components of the loan portfolio, which will increase the stability of the banking system.
Keywords
loan portfolio; probability of default; change in probability of default; normal distribution; commercial banks; loss given by default; exposure at default; expected losses; distance to default; Pearson criterion.
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About Authors
Podluzhny Sergey Sergeevich – Senior Lecturer, Department of Modeling Control Systems, Higher School of Economics and Management, Ural Federal University named after the first President of Russia B.N. Yeltsin, Ekaterinburg, Russia (620002, Ekaterinburg, Mira street, 19); e-mail: sergey.podluzhnyy@gmail.com.
For citation
Podluzhny S.S. On the Distribution of Change of Probability of Default of Credit Portfolio of a Commercial Bank. Bulletin of Ural Federal University. Series Economics and Management, 2017, Vol. 16, No. 6, 969-984. DOI: 10.15826/vestnik.2017.16.6.046
Article info
Received July 3, 2017; Accepted September 7, 2017.
DOI: http://dx.doi.org/10.15826/vestnik.2017.16.6.046
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