Provisions and Economic Capital for Credit Losses

Dorinel Bastide () and Stéphane Crépey ()
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Dorinel Bastide: LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - ENSIIE - Ecole Nationale Supérieure d'Informatique pour l'Industrie et l'Entreprise - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, BNP-Paribas, Stress Testing Methodologies & Models - BNP-Paribas
Stéphane Crépey: LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité

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Abstract: Based on supermodularity ordering properties, we show that convex risk measures of credit losses are nondecreasing w.r.t. credit-credit and, in a wrong-way risk setup, credit-market, covariances of elliptically distributed latent factors. These results support the use of such setups for computing credit provisions and economic capital or for conducting stress test exercises and risk management analysis.

Keywords: Supermodular function; convex risk measure; supermodular random variables; stop loss property; elliptical distribution; credit loss; economic capital; current expected credit loss; CVA; CCP; CDO tranches (search for similar items in EconPapers)
Date: 2024-01-11
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