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Financial Stability Institute

FSI Award 2010 Winning Paper
Regulatory use of system-wide estimations of PD, LGD and EAD Jesus Alan Elizondo Flores Tania Lemus Basualdo Ana Regina Quintana Sordo Comisión Nacional Bancaria y de Valores, Mexico September 2010

JEL classification: G21, G28

The views expressed in this paper are those of their authors and not necessarily the views of the Financial Stability Institute or the Bank for International Settlements.

Copies of publications are available from: Financial Stability Institute Bank for International Settlements CH-4002 Basel, Switzerland E-mail: fsi@bis.org Tel: +41 61 280 9989 Fax: +41 61 280 9100 and +41 61 280 8100 This publication is available on the BIS website (www.bis.org).

© Financial Stability Institute 2010. Bank for International Settlements. All rights reserved. Brief excerpts may be reproduced or translated provided the source is cited.

ISSN 1684-7180

Foreword

The Financial Stability Institute is pleased to present the winning FSI Award paper for 2010. This award, given every two years at the time of the International Conference of Banking Supervisors, was established to encourage thought and research on issues relevant to banking supervisors globally. In 2010, nine papers were received from central banks and supervisory authorities in eight countries. A jury of highly qualified individuals read all of the papers and chose the winner. The group was chaired by Mr Jaime Caruana, General Manager of the Bank for International Settlements. It also included Mrs Ruth de Krivoy, former President of the Central Bank of Venezuela; Mr Nick LePan, former Superintendent of Financial Institutions, Canada; Mr Charles Freeland, former Deputy Secretary General of the Basel Committee on Banking Supervision; and Mr Stefan Walter, Secretary General of the Basel Committee on Banking Supervision. The jury members and the FSI are pleased to announce that the paper authored by Mr Jesus Alan Elizondo Flores, Ms Tania Lemus Basualdo and Ms Ana Regina Quintana Sordo of the Mexican Comisión Nacional Bancaria y de Valores has been chosen as the winner of the 2010 FSI Award. In the paper, the authors set out an example of how to use a prudential tool typically aimed at coping with the solvency of individual banks to deal with the measurement of systemic risk. Congratulations to our three winners, as well as to the authors of the other papers submitted for consideration. Their interest in analysing and potentially improving supervisory methods provides a true service to the supervisory community. Josef Tošovský Chairman Financial Stability Institute September 2010 FSI Award – 2010 Winning Paper

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Contents

Foreword ..................................................................................... i 1. 2. 3. 4. 5. Introduction ...................................................................... 1 System-wide PD, LGD and EAD...................................... 2 System-wide information and PD, LGD and EAD models.............................................................................. 6 Empirical results............................................................. 10 Model applications ......................................................... 15 5.1 5.2 5.3 5.4 5.5 6. Credit card portfolio reserves............................... 15 System-wide PD dependency on idiosyncratic and cyclical factors............................................... 20 Bank IRB model comparison to system-wide model estimates................................................... 29 Risk return analysis of the credit card portfolio.... 32 Differences in point-in-time (PIT) models and through-the-cycle (TTC) estimations ................... 38

Conclusions.................................................................... 42

Annex 1: Explanatory variables................................................ 44 Annex 2: Reserve requirement rule...
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