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  1. 1 Mathematical Economics

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  1. 1 Siarka P.

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  1. 1 2014

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Exposure at default. The problem of its estimation in the context of capital requirements

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Siarka P.
Mathematical Economics
|
2014
|
issue 10(17)
61-78
EN
Credit risk analysis is largely based on the principles set out by the Basel Committee. Next to the probability of default and recovery rate, one of the most important elements of risk management systems is the value of the exposure at default. This paper presents the issue of EAD (Exposure at Default) estimation with respect to both balance sheet and off-balance sheet items. The author refers to the problem regarding the assessment of EAD forecast quality. He presents the results of the simulations conducted for the most common retail portfolios. The results show that the expected value of the exposure at default is significantly lower than the balance value at the moment of capital requirement calculation. This leads to the conclusion that the approach recommended by the Basel Committee, based on the current book value of the exposure, may result in the overestimation of EAD. The paper contains the proposal of the method which was leveraged for retail products (cash loans, car loans, mortgage loans).
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