Stress testing credit card portfolios: an application in South Africa

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 autocorrelations of the errors. The second approach was a set of vintage-level models that 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.

Keywords:

• consumer credit risk
• credit card
• stress testing
• application in banking

Acknowledgements

The authors want to thank the anonymous financial institute that supported this work. Without their help, the work could not have been undertaken. The authors would also like to thank all three anonymous referees who provided insightful recommendations and suggestions. Any mistakes are solely theirs.

Notes

1 For confidentiality reasons, in this paper we do not disclose the actual value of the percentage loss.

2 (+) indicates the explanatory variable has a positive sign.

3 (−) indicates the explanatory variable has a negative sign.