Journal of Credit Risk

A credit value adjustment scheme for bank loan portfolios

Dror Parnes


In this study the authors develop an analytical scheme that integrates a large spectrum of typical bank loans and credits, accommodates common bank loan portfolio chronological interdependencies and allows the necessary credit value adjustments (CVAs) for the unilateral default risk exposures of lending institutions both at the individual loan level and at the entire portfolio level. They compose a practical framework for CVAs of bank loan portfolios based on several extensions of ordinary techniques in probability theory that acquire the marginal, conditional and total probabilities of default for each bank loan. They validate the model through a hypothetical yet highly realistic numerical example and further demonstrate the model's forecasting capabilities over various time horizons.