DP9205 Modeling default correlation in a US retail loan portfolio

Author(s): Dennis Bams, Magdalena Pisa, Christian C Wolff
Publication Date: November 2012
Keyword(s): Credit risk
JEL(s): G2, G3
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9205

This paper generalizes the existing asymptotic single-factor model to address issues related to industry heterogeneity, default clustering and parameter uncertainty of capital requirement in US retail loan portfolios. We argue that the Basel II capital requirement overstates the riskiness of small businesses even with prudential adjustments. Moreover, our estimates show that both location and spread of loss distribution bare uncertainty. Their shifts over the course of the recent crisis have important risk management implications. The results are based on a unique representative dataset of US small businesses from 2005 to 2011 and give fundamental insights into the US economy.