Agata LozinskayaPublished in:
Global Markets and Financial Engineering (Russian version)
– Volume 3, Number 1 (January-March, 2016)

JEL classification: C13, D81, G21

Keywords: credit risk, IRB-approach, mortgage


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Abstract:

Credit risk value to a large extent determines the requirements to asset size weighted by the risk level, to the loan impairment reserves, and, therefore, to a bank’s capital adequacy. This explains the increased interest of the banking community in improving the quality of credit risk assessment for various segments of the credit market including the Internal Ratings-Based Approach. The article discusses the modern opportunities of assessing the main components of mortgage risk. The author remarks the active development of the tools for quantitative data analysis including the econometric approach which prevails in the academic literature on the research problem and is reckoned among the promising development directions of real estate underwriting systems of commercial banks. This work is based on the results of project No. 14-5352 supported by the Economics Education and Research Consortium Inc. (EERC) and funded by the Global Development Network. The ideas presented in this article reflect the author’s expert opinion only and cannot be considered as the position of the Eurasia Foundation, US Agency for International Development, World Bank Institution, Global Development Network or the Government of Sweden.

Highlights:

► ignoring the interconnectedness of decision-making processes when modelling mortgage default probability causes the problem of random selectivity, which can be solved by using Heckman models
► there are a number of distinctive features of loss distribution in case of mortgage default, for example, bimodality and censoredness
► inhomogeneous loss distribution is associated with different rates of mortgage default recovery through enforcement of security
► it is necessary that various bank subdivisions should take an active part in assessing the share of default losses and modelling default probability
► the modern opportunities of mortgage risk assessment allow using the tools of qualitative analysis including finite modelling

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