An asset protection scheme for banks exposed to troubled loan portfolios

Anders Grosen (), Pernille Jessen () and Thomas Kokholm ()

Journal of Economics and Finance, 2014, vol. 38, issue 4, 568-588

Abstract: We examine a specific portfolio credit derivative, an Asset Protection Scheme (APS), and its applicability as a discretionary regulatory tool to reduce asymmetric information and help restore the capital base of troubled banks. The APS can be a fair-valued contract with an appropriate structure of incentives. We apply two alternative multivariate structural default risk models: the classical Gaussian Merton model and a model based on Normal Inverse Gaussian processes. Using a data set on annual farm level data from 1996 to 2009, we use the Danish agricultural sector as a case study and price an APS on an agricultural loan portfolio. We compute the economic capital for this loan portfolio with and without an APS. Moreover, we illustrate how model risk in the form of parameter uncertainty is reduced when an APS is attached to the loan portfolio. Copyright Springer Science+Business Media, LLC 2014

Keywords: Asset Protection Scheme; Asymmetric Information; Regulation; Credit Risk; Portfolio Credit Derivative; Normal Inverse Gaussian; G13; G21; G32; G38 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:jecfin:v:38:y:2014:i:4:p:568-588

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DOI: 10.1007/s12197-012-9233-z

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