University of Twente Student Theses
Economic valuation as acceptance metric for credit contracts
Morren, D.H.P. (2016) Economic valuation as acceptance metric for credit contracts.
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| Abstract: | Currently, Company X makes credit acceptance decisions based on the probability of default of an application. An application of which the PD is higher than the hurdle of X%, will be rejected. Through the deployment of such a measure, Company X tries to differentiate between good and bad applications. Although this is often a good method to keep risk in the portfolio on a target level, when using the PD risk measure solely the question arises whether this capture the possible profit/loss contribution of credit contracts. Within Company X that is why the question arose whether there might be an alternative measure that does provide insight in the profit/loss contribution of a contract. An extensive literature review indicated that the ratio called “Risk Adjusted Return on Capital” (RAROC) may provide this insight. The effectiveness of using RAROC is tested by analyzing a dataset of 58.337 financial lease applications. This study is carried out based on the following research question: “Can economic valuation (RAROC) outperform probability of default as criterion for the credit acceptance decision, measured by an increase in overall portfolio profit?” The results of this study showed that the RAROC method is able to outperform the PD method. |
| Item Type: | Essay (Master) |
| Faculty: | BMS: Behavioural, Management and Social Sciences |
| Subject: | 83 economics |
| Programme: | Business Administration MSc (60644) |
| Link to this item: | https://purl.utwente.nl/essays/69674 |
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