Economic Capital for Retail Credit Card Portfolios

Geoffrey Rubin

UNIQUE CAPITAL MODELLING CONSIDERATIONS

While credit card portfolios share many characteristics with other retail portfolios – granularity, portfolio size, management techniques – their unique characteristics challenge economic capital modellers. Among the credit card features that impact the assessment of unexpected loss and capital need are the following.

Undrawn credit lines. Credit cards are unique in that both borrower and lender possess options on the undrawn line: borrowers can draw down – and lenders can cancel – the remaining credit line at will. Open credit limit is a key aspect of card utility, with borrowers typically preferring higher limits. Along with rate, features and rewards, credit limit is an important basis for product differentiation. Undrawn line is also a source of backstop funding for distressed borrowers. While drawdown behaviour in advance of default is more complex than “charge to the max”, borrowers typically draw on open lines prior to default.

Issuer disposition towards open credit line is more subtle. On the one hand, undrawn lines represent potential future outstandings and earnings. Credit line size is also a source of competition among issuers