Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249600 
Year of Publication: 
2022
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 4/2022
Publisher: 
Bank of Finland, Helsinki
Abstract: 
A parsimonious extension of a well-known portfolio credit-risk model allows us to study a salient stylized fact - abrupt switches between high- and low-loss phases - from a risk-management perspective. As uncertainty about phase switches increases, expected losses decouple from unexpected losses, which reflect a high percentile of the loss distribution. Banks that ignore this decoupling have shortfalls of loss-absorbing resources, which is more detrimental if the portfolio is more diversified within a phase. Likewise, the risk-management benefits of improving phase-switch forecasts increase with diversification. The analysis of these findings leads us to an empirical method for comparing the degree of within-phase default clustering across portfolios.
Subjects: 
Expected loss provisioning
Bank capital
Unexpected losses
Credit cycles
Portfolio credit risk
JEL: 
G21
G28
G32
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-399-7
Document Type: 
Working Paper

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