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Practice paper

Calibrating exposure at default for corporate credit lines

Gabriel Jimenéz, Jose A. Lopez and Jesús Saurina
Journal of Risk Management in Financial Institutions, 2 (2), 121-129 (2009)
https://doi.org/10.69554/OPNJ4752

Abstract

The management of credit risk inherent in a corporate credit line is similar to that of a term loan, but with one key difference. In addition to needing to know the borrower's probability of default and the facility's loss given default, the bank must also have a measure of the line's exposure at default (EAD). In fact, EAD is one of the key parameters used for regulatory capital calculations within the Basel II framework. This paper constructs and examines EAD values for credit lines within the Spanish credit register, which provides a census of all corporate lending within Spain over the last 20 years. The analysis shows that defaulting firms have significantly higher credit line usage rates and EAD values up to five years prior to their actual default. Furthermore, the analysis indicates that there are important variations in EAD values due to credit line size, collateralisation and maturity. While the results are derived from data for a single country, they should provide useful benchmarks for further academic, business and policy research into this under-developed area of credit risk management.

Keywords: exposure at default; EAD; loss equivalent amount; LEQ; credit lines; Basel II

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Author's Biography

Gabriel Jimenéz is Head of the Banking Analysis Unit in the Financial Stability Department at the Banco de España. His work has been published in several top economic and finance journals.

Jose A. Lopez is a research adviser in the Financial Group of the Economic Research Department at the Federal Reserve Bank of San Francisco. His current research focuses on credit risk measurement and management issues. His work has been published in several top economic and finance journals.

Jesús Saurina is Director of the Financial Stability Department at the Banco de España and a member of the Banking Supervision Committee of the European Central Bank/Eurosystem. He was also an associate professor at Carlos III University. His work has been published in several top economic and finance journals.

Citation

Jimenéz, Gabriel, Lopez, Jose A. and Saurina, Jesús (2009, March 1). Calibrating exposure at default for corporate credit lines. In the Journal of Risk Management in Financial Institutions, Volume 2, Issue 2. https://doi.org/10.69554/OPNJ4752.

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

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