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Exposure at Default Model for Contingent Credit Line

by Pinaki Bag of Union National Bank, Abu Dhabi

April 1, 2010

Abstract: In-spite of large volume of Contingent Credit Lines (CCL) in all commercial banks paucity of Exposure at Default (EAD) models, unsuitability of external data and inconsistent internal data with partial draw-down, has been a major challenge for risk managers as well as regulators for managing CCL portfolios. Current paper is an attempt to build an easy to implement, pragmatic and parsimonious yet accurate model to determine exposure distribution of a CCL portfolio. Each of the credit line in a portfolio is modeled as a portfolio of large number of option instrument which can be exercised by the borrower determining the level of usage. Using an algorithm similar to basic CreditRisk+ and Fourier Transforms we arrive at a portfolio level probability distribution of usage.

JEL Classification: G20, G21, G13.

Keywords: Exposure At Default (EAD) Model, Basel II, Credit Risk, Contingent credit line (CCL).

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