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Article

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

by †,‡, †,‡, †,‡ and *,†,‡
Centre for Business Mathematics and Informatics, North-West University, Potchefstroom 2531, South Africa
*
Author to whom correspondence should be addressed.
Current address: Internal box 576, Private bag X6001, Potchefstroom 2531, South Africa.
These authors contributed equally to this work.
Academic Editor: Jiří Witzany
Received: 8 April 2021 / Revised: 12 May 2021 / Accepted: 18 May 2021 / Published: 1 June 2021
(This article belongs to the Special Issue Quantitative Risk Modeling and Management—New Regulatory Challenges)
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. View Full-Text
Keywords: loss given default; survival analysis; IFRS 9 loss given default; survival analysis; IFRS 9
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MDPI and ACS Style

Joubert, M.; Verster, T.; Raubenheimer, H.; Schutte, W.D. Adapting the Default Weighted Survival Analysis Modelling Approach to Model IFRS 9 LGD. Risks 2021, 9, 103. https://0-doi-org.brum.beds.ac.uk/10.3390/risks9060103

AMA Style

Joubert M, Verster T, Raubenheimer H, Schutte WD. Adapting the Default Weighted Survival Analysis Modelling Approach to Model IFRS 9 LGD. Risks. 2021; 9(6):103. https://0-doi-org.brum.beds.ac.uk/10.3390/risks9060103

Chicago/Turabian Style

Joubert, Morne, Tanja Verster, Helgard Raubenheimer, and Willem D. Schutte 2021. "Adapting the Default Weighted Survival Analysis Modelling Approach to Model IFRS 9 LGD" Risks 9, no. 6: 103. https://0-doi-org.brum.beds.ac.uk/10.3390/risks9060103

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