Credit risk management

1. Example Index
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Example Description Excel technique
1 Exposure at default
2 Loss given default
3 Probability of default
4 Residual maturity
5 Expected loss
6 A simple loan
7 Standard normal distribution Normsdist(…) and Normsinv(…)
This Excel workbook is prepared in accordance with
Chapter 1 of the text book
"Managing Credit Risk Under The Basel III Framework, 3rd
ed"
Authored by : Dr. LAM Yat-fai (林日辉)
Principal, Structured Products Analytics, CapitaLogic Limited
Adjunct Professor of Finance, City University of Hong Kong
Doctor of Business Administration
CFA, CAIA, CAMS, FRM, PRM
Website: https://sites.google.com/site/crmbasel
E-mail: crmbasel@gmail.com
Copyright 2018 CapitaLogic Limited

2. Example 1 Exposure at default
Principal 10,000
Interest 1,000
EAD 11,000
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3. Example 2 Loss given default
Loan EAD Loss Total EAD 10,040,116
1 10,769 5,289 Total loss 7,999,358
2 10,504 8,052 Average LGD 79.67%
3 9,614 8,291
4 10,582 5,853
5 9,816 10,279
6 10,725 8,473
7 10,635 6,055
8 8,728 8,728
9 9,228 6,415
10 10,352 8,678
11 10,981 6,564
12 8,976 7,798
13 10,980 8,898
14 9,489 7,525
15 10,012 7,132
16 10,223 7,257
17 8,953 6,392
18 8,620 7,539
19 9,731 7,126
20 9,885 6,730
21 9,776 6,826
22 10,129 6,491
23 10,498 6,497
24 9,702 8,211
25 8,719 6,834
26 10,186 6,169
27 9,479 7,478
28 11,163 10,177
29 11,074 7,329
30 8,950 8,785
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4. Example 3 Probability of default
Borrower Default in 1 year No. of borrowers 1000
1 No No. of defaults 23
2 No Default rate 2.30%
3 No
4 No PD 2.30%
5 No
6 No
7 No
8 No
9 No
10 No
11 No
12 No
13 No
14 No
15 No
16 No
17 No
18 No
19 No
20 No
21 No
22 No
23 No
24 No
25 No
26 No
27 No
28 No
29 No
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5. Example 4 Residual maturity
Month Cash outflow Cash inflow
0 -10,000
1 100
2 100
3 100
4 100
5 100
6 100
7 100
8 100
9 100
10 100
11 100
12 100
13 100
14 100
15 100
16 100
17 100
18 100
19 100
20 100
21 100
22 100
23 100
24 100
25 100
26 100
27 100
28 100
29 100
30 100
31 100
32 100
33 100
34 100
35 100
36 10,100
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6. Example 5 Expected loss
EAD 10,000
LGD 80%
PD 3%
1-year EL 240
RM Year EL Approximation % error
1 240 240 0.0000%
2 473 480 1.5228%
3 699 720 3.0609%
4 918 960 4.6142%
5 1,130 1,200 6.1827%
6 1,336 1,440 7.7664%
7 1,536 1,680 9.3652%
8 1,730 1,920 10.9793%
9 1,918 2,160 12.6084%
10 2,101 2,400 14.2527%
Month
1 0.083333333 20 20 -1.3826%
2 0.166666667 41 40 -1.2574%
3 0.25 61 60 -1.1321%
4 0.333333333 81 80 -1.0068%
5 0.416666667 101 100 -0.8813%
6 0.5 121 120 -0.7557%
7 0.583333333 141 140 -0.6300%
8 0.666666667 161 160 -0.5042%
9 0.75 181 180 -0.3783%
10 0.833333333 201 200 -0.2523%
11 0.916666667 220 220 -0.1262%
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7. Example 6 A simple loan
EAD 10,000
LGD 90%
PD 3%
RM 3
Default loss 9,000
Default chance 8.7327%
EL 786
1-year EL 270
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8. Example 7 Standard normal dist
Cumulative standard normal distribution
x -1.8808 Probit -1.8808
Φ(x) 3% PD 3%
Inverse cumulative standard normal distribution
x 3% PD 3%
Φ-1
(x) -1.8808 Probit -1.8808
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