Dissertation > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Financial organizations, banks > Commercial bank

Using through the Cycle Method to Modify Probability of Default Measurement Based on Point-in-time

Author LiuJia
Tutor PengJianGang; LiuXiPing
School Hunan University
Course Finance
Keywords Commercial Bank Basel Ⅲ Point in Time (PIT) Through the cycle (TTC) Probability of Default
CLC F830.33
Type Master's thesis
Year 2011
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There is a close relationship between credit risk and macroeconomic, but traditional method of the default probability measurement does not take the pro-cyclical factors into account. This pro-cyclicality has a strong negative impact on the sound operation of commercial banks and steady growth of the macroeconomic, leading to an excessive positive feedback mechanism between finance and economic. The problem of pro-cyclical risk measurement is an issue of great concern for academia since the global financial crisis of2008.Based on the method of Point in Time (PIT) default probability measurement, this paper proposed the idea of using the through the cycle (TTC) to solve the problem of pro-cyclicality of risk measurement. Firstly, we introduce the factor of economic cycle into the method of through the cycle (TTC) risk measurement. Secondly, depending on the macroeconomic situation, take the situation of economic recession or the average of the GDP growth rate as the reference for through the cycle (TTC) adjustment accordingly. Finally, fix the credit risk parameters estimated by Point in Time (PIT) to weaken macroeconomic cyclical effects on the probability of default estimation.According to this idea, this paper select ordered logistic regression model in Point in Time (PIT), take the GDP growth rate as the factor of economic cycle and use the data of the listed companies as the sample for empirical analysis. The empirical results show that the risk parameter modified by the through the cycle (TTC) adjustment can effective solve the problem of pro-cyclicality using Point in Time (PIT) and the risk parameters are significantly attenuated. According to the results of the study in this paper and the situation in our country, this paper puts forward some countermeasures.

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