A foundational approach to credit migration for stress testing and expected credit loss estimation
Abstract
Structural regularities in the dynamics of risk ratings can be used to characterise credit migration using a few indicators of economic activity. These regularities can be used to construct plausible stress test scenarios for credit migration that include the effects of credit cycles and economic activity for different countries beyond the limitations of historical data. The approach can be used to generate a range of plausible scenarios consistent with given economic conditions and uncertainty through the credit cycle.
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Author's Biography
Jorge R. Sobehart is a managing director at Citi’s Quantitative Risk and Stress Testing unit (Credit and Obligor Risk Analytics) where he manages advanced modelling for credit risk capital allocation, stress testing and CCAR/DFAST, and loan loss reserves and IFRS9/CECL for wholesale portfolios. During his career, he has worked for several prestigious institutions making contributions and publishing technical papers in multiple fields. He also acted as a reviewer for several professional journals and book editors in risk management, finance, physics, computation and mathematical modelling. Dr Sobehart has advanced degrees in physics and postdoctoral experience at the US-Los Alamos National Laboratory.
Xiaoming Sun is a senior vice president at Citi’s Quantitative Risk and Stress Testing unit (Credit and Obligor Risk Analytics) where she manages the development of credit reserves and liquidity risk models for wholesale portfolios, including the International Financial Reporting Standard 9 (IFRS 9) and the Current Expected Credit Loss (CECL) standard in the USA. She previously worked on loss likelihood and loss severity models for advanced stress testing and the US Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test (DFAST), and performed research on quality migration models for retail products. During her career, she made contributions in different topics for credit and marketing modelling. Mrs Sun has a master’s in statistics and extensive experience in credit modelling and marketing.
Citation
Sobehart, Jorge R. and Sun, Xiaoming (2018, March 1). A foundational approach to credit migration for stress testing and expected credit loss estimation. In the Journal of Risk Management in Financial Institutions, Volume 11, Issue 2. https://doi.org/10.69554/MHCO4117.
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