A credit risk model for consumer loan portfolios

Abstract

We propose a credit risk model for consumer loan portfolios in Brazil. Consumer profiles and the risk classification of credit operations are used to segment the portfolios. Credit loss distributions for each segment are selected and used in a Monte Carlo simulation process to generate the loss distribution of the portfolios. The dependence among the credit losses in the different segments of the portfolios is modeled through an elliptical copula function. Statistical tests are done and show that the proposed model is adequate to represent credit loss distributions in consumer credit in Brazil. © 2007 by The Haworth Press. All rights reserved.