Default Loan Amount

The loss amount of credit (or the loss volume ; abbreviation EAD of English exposure at default ) is in the banking one account regulatory risk parameters for measuring the credit risk . Other terms are the loan amount at the time of default , the amount of the claim in the event of default and the loan volume in the event of default .

The default volume as a parameter provides an estimate of the actual loan amount at the time of a borrower's default .

General

In addition to the default loan amount (EaD), there are also risk parameters like the default probability (PD) and the default loss rate (LGD). All three parameters are hypothetical quantities that are based on stochastic probabilities .

These parameters were first introduced in January 2007 in all EU member states , in Germany through the Solvency Regulation . Its supervisory function has been taken over by Regulation (EU) No. 575/2013 (Capital Adequacy Regulation) (CRR), which also applies in all EU member states, since January 2014 . It provides legal definitions for these parameters . According to this, the default credit amount is “the amount of the receivables of all risk positions related to the… debtor” (Art. 261 (1) CRR). In Art. 304 Para. 4 CRR, the EaD (“amount of receivables in the event of default”) is mentioned as the calculation basis for clearing members.

scope

The default loan amount (EaD) is generally the volume of credit that is likely to be outstanding at the time a borrower defaults, i.e. that may not be repaid ( bad debt ). In the specialist literature, the value conventions of book value , nominal value or market value are used as a basis for calculation . In the classic lending business , the default loan amount generally corresponds to the book value of all receivables from a borrower . The ECB, in turn, sees the default loan amount as the "nominal value of the debt of the borrower at the point in time at which the borrower can no longer meet his obligations". However, for banking operational reasons, the book value and nominal value are not very suitable for quantifying the economic damage incurred in the event of default, because in the event of a default, a comparable credit position can only be restored at the current market value at the time of default. Therefore, when estimating the default loan amount, the probable replacement costs of an alternative loan volume must be used.

When determining the amount of default credit, different types of credit have to be considered. Amortization loans ( installment loans and annuity loans ) are regularly repaid , so that, as a rule, at the time of the loan default, there is already a lower loan volume than the initial loan. In term loans or not on a regular basis to be repaid types of credit ( bank overdraft , overdraft facility , Lombard credit , revolving credit or stand-by credit ) the level of utilization of the original's credit lines and facilities to estimate the time of failure. Credit lines and facilities of this kind are of decisive importance for the level of risk because their utilization can fluctuate over time. There is a positive correlation between the rating of the borrower and the exposure ( exposure ) of such credit lines , so that if the creditworthiness deteriorates, the likelihood of higher credit utilization increases.

Partly drawn down loan commitments with a term of more than one year, which do not have the right to terminate , are taken into account to determine the default loan amount as follows:

${\displaystyle {\text{EaD}}=K_{L}\cdot 50\,\%+K_{A}\cdot 100\,\%}$.

Are there

${\displaystyle K_{L}}$ the unused credit line and

${\displaystyle K_{A}}$ the used credit line.

The utilized part of the credit line is therefore taken into account at 100% and the unused part at 50% in the EaD.

The default loan amount, like the default probability, relates to the borrower unit ( group ), since normally it is not a single loan but a debtor with all loans that defaults. The default loan amount is therefore the total amount of credit drawn by a borrower at the time of default. The legal definition in Art. 261 (1) CRR expresses this. Existing individual value adjustments are not to be taken into account in the default loan amount, as are existing loan collateral - these are taken into account as a reduction in the default loss rate (this corresponds to an increase in the complementary recovery rate ).

application

Credit institutions that choose the credit risk standardized approach or the IRB basic approach for their rating are given the default credit amount (EaD) as a default value by the banking supervisory authority. These institutions only have to estimate the probability of default (PD) themselves. Only institutions that use the advanced IRB approach have to determine the EaD themselves as follows:

${\displaystyle {\text{EL}}={\text{PD}}\cdot {\text{LGD}}\cdot {\text{EaD}}}$

Here are:

${\displaystyle {\text{EL}}}$the expected risk of default ( English expected loss )

${\displaystyle {\text{PD}}}$the probability of default ( english probability of default ) and

${\displaystyle {\text{LGD}}}$the default loss ratio ( English loss given default ).

From January 2017, the following formula will apply to counterparty default risks from derivatives and transactions with a long settlement period :

${\displaystyle {\text{EaD}}=\alpha \cdot ({\text{RC}}+{\text{PFE}})}$.

Here are:

${\displaystyle \alpha =1{,}4}$ a regulatory requirement that may be changed later,

${\displaystyle {\text{RC}}}$the replacement cost ( English replacement costs )

${\displaystyle {\text{PFE}}}$the future potential exposure ( English potential future exposure ).

There are calculation rules for these two variables depending on the exposure class ( interest rate derivatives , currency derivatives , credit derivatives , equity derivatives, commodity derivatives ), margining, the deposited credit security , the market value of the portfolio , the term and much more. The actual calculation steps are mostly of an elementary nature; the complexity of the model results in particular from the numerous case decisions.

meaning

The risk parameters default loan amount (EAD) is in loans to the remaining loan amount the time of failure of a borrower. In empirical studies it has been found that there is a strong positive correlation between the rating and the default loan amount. This is because borrowers with poorer ratings are more likely to fully utilize their credit lines during the corporate crisis than borrowers with better credit ratings .

Individual evidence

1. ^ Hans Christian Elbracht: Statistical Methods for Quantifying and Estimating the Loss Given Default . BoD - Books on Demand, 2011, ISBN 978-3-8441-0054-9 , here p. 15. ( limited preview in the Google book search).
2. ↑ Michael Knapp, Alfred Hamerle: Multi-factor model for determining segment-specific default probabilities for credit portfolio management . In: Business Informatics . No. 41 , 1999, p. 138-144 , here 138. .
3. ↑ European Central Bank: Monthly Report January 2005. pp. 53, 56.
4. ^ Frank Bröker: Quantification of credit portfolio risks. 2000, p. 24.
5. ^ Wilhelm Schmeisser, Lydia Clausen, Gerfried Hannemann (eds.): Bank controlling with key figures. 2009, p. 14 f. ( books.google.de ).
6. ↑ Roland Eller, Markus Heinrich, René Perrot, Markus Reif: Compact knowledge of risk management. 2010, p. 52 ( books.google.de ).
7. ↑ Martin Ackermann: The importance of the securitization of receivables for the internal audit using the example of credit pooling. In: Axel Becker, Arno Kastner (ed.): Examination of the lending business by the internal audit. 2007, p. 535.
8. ^ Eva Wagner: Credit Default Swaps and Information Content. 2008 p. 9, FN 33 ( books.google.de ).
9. ^ The standardized approach for measuring counterparty credit risk exposures. (PDF) In: Basel Committee on Banking Supervision. Retrieved June 20, 2016 . 
10. ^ Felix Manz: Process-oriented credit management. 1998, p. 161.