Abstract:
Active credit portfolio management is becoming a central part of capital and credit
management within the banking industry. Stimulated by the Basel II capital accord the
estimation of risk sensitive credit and capital management is central to success in an
increasingly competitive environment. If any risk mitigation or value-enhancing
activity is to be pursued, a credit portfolio manager must be able to identify the
interdependencies between exposures in a portfolio, but more importantly, be able to
relate credit risk to tangible portfolio effects on which specific actionable items can be
taken.
This analysis draws on the macroeconometric vector error correcting model (VECM)
developed by De Wet et al. (2007) and applies the proposed methodology of Pesaran,
Schuermann, Treutler and Weiner (2006) to a fictitious portfolio of corporate bank
loans within the South African economy. It illustrates that it is not only possible to
link macroeconomic factors to a South African specific credit portfolio, but that
scenario and sensitivity analysis can also be performed within the credit portfolio
model. These results can be used in credit portfolio management or standalone credit
risk analysis, allowing practical credit portfolio management and value enhancing
applications.
