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Practice paper

Credit risk term-structures for lifetime impairment forecasting: A practical guide

Jimmy Skoglund
Journal of Risk Management in Financial Institutions, 10 (2), 177-195 (2017)
https://doi.org/10.69554/ICHC6682

Abstract

In this paper, we provide an overview of the credit model approaches for lifetime impairment models. The main focus is on the models for credit risk term-structures, which are a particularly important component that banks are currently struggling with. We also, however, discuss briefly the different model approaches for loss given default and exposure. The aim of this paper is to provide a (relatively) non-technical overview of modelling approaches to aid in understanding different models properties and consequently in model selection. For those that require more details for actual model implementation we provide references to the literature. We also discuss how to decompose the period to period impairment change into its components for change explanation. An impairment decomposition is quite straightforward and can be done using incremental change of the components, or, a log-linearisation. The benefit of the log-linearisation is its order independence.

Keywords: credit risk, macroeconomics, impairment forecasting, lifetime credit loss, credit risk term-structures, IFRS 9

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Author's Biography

Jimmy Skoglund is Principal Product Manager at SAS. He has more than 15 years’ experience developing and implementing risk methodologies, both at SAS and previously with banks. Jimmy has worked in various areas of risk management, including market, credit and liquidity risk. He holds a PhD from Stockholm School of Economics and is a regular contributor to publications in risk and finance journals and has also published a comprehensive financial risk management book with Wiley Finance.

Citation

Skoglund, Jimmy (2017, April 1). Credit risk term-structures for lifetime impairment forecasting: A practical guide. In the Journal of Risk Management in Financial Institutions, Volume 10, Issue 2. https://doi.org/10.69554/ICHC6682.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 10 / Issue 2
© Henry Stewart
Publications LLP

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