CALCULATION OF ECONOMIC CAPITAL FOR COVERING UNEXPECTED CREDIT LOSSES UNDER CONSUMER LOANS PORTFOLIO
The article is devoted to assessing the risk of the consumer loans portfolio and the effective bank management. The solution to this problem is relevant for credit institutions in modern conditions. The most commonly used models of credit risk measurement, based on Basel Capital Accord, are focused on the issue of corporate loans and require modification for applying them to a consumer loan portfolio. Within these models the credit risk estimation is reduced to the calculation of so-called economic capital. Unlike expected credit losses, unexpected credit losses couldn’t be included into a credit cost and should be compensated by equity. The economic capital reflects required equity amount to cover unexpected credit losses with a given confidence level. The authors developed an original method of calculating a bank reserve for covering expected credit losses, and a method of calculating an economical capital for covering unexpected credit losses under consumer loan portfolio during a year. The methodology uses the VaR method for measuring credit risk. The result was tested on the data provided by a regional retail bank. The proposed method can be used by commercial banks for defining bank's reserve to cover consumer credit losses and for evaluating an economic capital being an overall risk indicator under a loan portfolio.