A0802
Title: Probit or logit model for the regulatory capital and IFRS9 calculations
Authors: Jiri Witzany - University of Economics in Prague (Czech Republic) [presenting]
Abstract: The Probit model based on the normal distribution has become a workhorse of the Basel II internal rating based (IRB) regulatory capital and IFRS9 expected credit loss (ECL) calculations. On the other hand, the Logit (scoring) model has become an industrial standard in credit risk modeling in banks and financial institutions. There are many arguments why Logit should be preferred with respect to the Probit model. We propose and analyze how to replace the Probit assumptions with Logit in the IRB formula and in IFRS9 calculations. In an empirical study, we will demonstrate substantial differences in default correlation estimations conditional on the two models and the impact on regulatory capital and ECL numbers. The Logit model yields generally more conservative estimates that would have, in our opinion, a significant impact on capital adequacy ratios of the overall banking sector.
