Survival Analysis for Credit Risk: A Dynamic Approach for Basel IRB Compliance

Fernando L. Dala, Manuel L. Esquível and Raquel M. Gaspar ()
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Fernando L. Dala: Banco Nacional de Angola, Av. 4 de Fevereiro n. 151, Luanda, Angola
Manuel L. Esquível: School of Science and Technology and Nova Math, Universidade Nova de Lisboa, 2829-516 Caparica, Portugal
Raquel M. Gaspar: ISEG Research, Lisbon School of Economics and Management, Universidade de Lisboa, Rua do Quelhas, n. 6, 1200-781 Lisboa, Portugal

Risks, 2025, vol. 13, issue 8, 1-22

Abstract: This paper uses survival analysis as a tool to assess credit risk in loan portfolios within the framework of the Basel Internal Ratings-Based (IRB) approach. By modeling the time to default using survival functions, the methodology allows for the estimation of default probabilities and the dynamic evaluation of portfolio performance. The model explicitly accounts for right censoring and demonstrates strong predictive accuracy. Furthermore, by incorporating additional information about the portfolio’s loss process, we show how to empirically estimate key risk measures—such as Value at Risk (VaR) and Expected Shortfall (ES)—that are sensitive to the age of the loans. Through simulations, we illustrate how loss distributions and the corresponding risk measures evolve over the loans’ life cycles. Our approach emphasizes the significant dependence of risk metrics on loan age, illustrating that risk profiles are inherently dynamic rather than static. Using a real-world dataset of 10,479 loans issued by Angolan commercial banks, combined with assumptions regarding loss processes, we demonstrate the practical applicability of the proposed methodology. This approach is particularly relevant for emerging markets with limited access to advanced credit risk modeling infrastructure.

Keywords: survival analysis; loan portfolios; default probability; Gompertz–Makeham model; hazard function; value at risk (VaR); expected shortfall (ES); Monte Carlo simulation; Basel IRB approach; loss distribution (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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