Adapting the Default Weighted Survival Analysis Modelling Approach to Model IFRS 9 LGD

Morne Joubert, Tanja Verster, Helgard Raubenheimer and Willem D. Schutte
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Morne Joubert: Centre for Business Mathematics and Informatics, North-West University, Potchefstroom 2531, South Africa
Tanja Verster: Centre for Business Mathematics and Informatics, North-West University, Potchefstroom 2531, South Africa
Helgard Raubenheimer: Centre for Business Mathematics and Informatics, North-West University, Potchefstroom 2531, South Africa
Willem D. Schutte: Centre for Business Mathematics and Informatics, North-West University, Potchefstroom 2531, South Africa

Risks, 2021, vol. 9, issue 6, 1-17

Abstract: Survival analysis is one of the techniques that could be used to predict loss given default (LGD) for regulatory capital (Basel) purposes. When using survival analysis to model LGD, a proposed methodology is the default weighted survival analysis (DWSA) method. This paper is aimed at adapting the DWSA method (used to model Basel LGD) to estimate the LGD for International Financial Reporting Standard (IFRS) 9 impairment requirements. The DWSA methodology allows for over recoveries, default weighting and negative cashflows. For IFRS 9, this methodology should be adapted, as the estimated LGD is a function of in the expected credit losses (ECL). Our proposed IFRS 9 LGD methodology makes use of survival analysis to estimate the LGD. The Cox proportional hazards model allows for a baseline survival curve to be adjusted to produce survival curves for different segments of the portfolio. The forward-looking LGD values are adjusted for different macro-economic scenarios and the ECL is calculated for each scenario. These ECL values are probability weighted to produce a final ECL estimate. We illustrate our proposed IFRS 9 LGD methodology and ECL estimation on a dataset from a retail portfolio of a South African bank.

Keywords: loss given default; survival analysis; IFRS 9 (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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