Estimating expected lifetime of revolving credit facilities in an IFRS 9 framework

University essay from Lunds universitet/Matematisk statistik

Author: Jonas Berglund; [2016]

Keywords: Mathematics and Statistics;

Abstract: This paper sets out to estimate expected lifetime of revolving credit facilities (e.g. credit card products) and is motivated by the introduction of the International Financial Reporting Standard 9 (IFRS 9) and its requirements for loan impairments. The reporting entity is required to estimate lifetime expected credit losses for certain nancial instruments. In practice, maximum contractual period for revolving credit facilities cannot be used in dening lifetime for the facility and credit risk mitigation actions need to be considered. A data set for a retail credit card portfolio was provided by a Nordic bank and for the lifetime denition derived, a model based on a conditional Markov chain was selected. Expected lifetime was estimated and an analytical expression for expected lifetime of revolving credit facilities was derived and validated.

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