Stress testing credit card portfolios: an application in South Africa

Abstract

Abstract:Motivated by a real problem, this study aims to develop models to conduct stress testing on credit card portfolios. Two modelling approaches were extended to include the impact of lenders' actions within the model. The first approach was a regression model of the aggregate losses based on economic variables with auto correlations of the errors. The second approach was a set of vintage level models which highlighted the months-on-book effect on credit losses. A case study using the models was described using South African credit card data. In this case the models were used to stress test the credit card portfolio under several economic scenarios.

Special issue credit risk modelling

“…In this paper, the authors extract principal components from macroeconomic variables and then include the factors in the hazard model. In the fourth paper, by Seah et al (2014), stress tests in the form of macroeconomic scenarios are presented to two types of models of portfolio-level default rates. These models include not only macroeconomic variables, but also dummies to account for differences over time in management actions on the portfolio.…”