Economic Capital Allocation for Corporate Borrowers Credit Risk Coverage

Abstract

Both the estimation of economic capital for bank's credit risk coverage, and the allocation of economic capital by sources in order to determine the contribution of individual elements to total credit risk play an important role in the area of risk management of a bank. The estimation of a bank's economic capital for credit risk coverage serves as a starting point in the management of a bank's credit risk, while the allocation of economic capital to cover credit risk among individual elements allows to answer the question of how individual elements contribute to the total credit risk of a bank, which makes it possible to take certain decisions on credit risk management based on the obtained results of allocation. Nowadays, there are various theoretical methods and approaches to solve this nontrivial issue. The authors of the article attempted to implement them in practice, to estimate economic capital for credit risk coverage of a commercial bank and to allocate it among elements. This problem was solved applying the Euler allocation method and kernel regression.