Survival Analysis for Credit Risk: A Dynamic Approach for Basel IRB Compliance

This paper uses survival analysis as a tool to assess credit risk in loan portfolios within the framework of the Basel Internal Ratings-Based (IRB) approach. By modeling the time to default using survival functions, the methodology allows for the estimation of default probabilities and the dynamic evaluation of portfolio performance. The model explicitly accounts for right censoring and demonstrates strong predictive accuracy. Furthermore, by incorporating additional information about the portfolio’s loss process, we show how to empirically estimate key risk measures—such as Value at Risk (VaR) and Expected Shortfall (ES)—that are sensitive to the age of the loans. Through simulations, we illustrate how loss distributions and the corresponding risk measures evolve over the loans’ life cycles. Our approach emphasizes the significant dependence of risk metrics on loan age, illustrating that risk profiles are inherently dynamic rather than static. Using a real-world dataset of 10,479 loans issued by Angolan commercial banks, combined with assumptions regarding loss processes, we demonstrate the practical applicability of the proposed methodology. This approach is particularly relevant for emerging markets with limited access to advanced credit risk modeling infrastructure.

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Publication Details

Journal
Risks
Published
2025-08-15
DOI
https://doi.org/10.3390/risks13080155
Primary Topic
Credit Risk and Financial Regulations
Type
article
Field-Weighted Citation Impact
0.00
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article

Survival Analysis for Credit Risk: A Dynamic Approach for Basel IRB Compliance

Raquel M. Gaspar, Manuel L. Esquível, Fernando L. Dala
Risks
Credit Risk and Financial Regulations
article

Survival Analysis for Credit Risk: A Dynamic Approach for Basel IRB Compliance

Raquel M. Gaspar, Manuel L. Esquível, Fernando L. Dala
article en

Abstract

This paper uses survival analysis as a tool to assess credit risk in loan portfolios within the framework of the Basel Internal Ratings-Based (IRB) approach. By modeling the time to default using survival functions, the methodology allows for the estimation of default probabilities and the dynamic evaluation of portfolio performance. The model explicitly accounts for right censoring and demonstrates strong predictive accuracy. Furthermore, by incorporating additional information about the portfolio’s loss process, we show how to empirically estimate key risk measures—such as Value at Risk (VaR) and Expected Shortfall (ES)—that are sensitive to the age of the loans. Through simulations, we illustrate how loss distributions and the corresponding risk measures evolve over the loans’ life cycles. Our approach emphasizes the significant dependence of risk metrics on loan age, illustrating that risk profiles are inherently dynamic rather than static. Using a real-world dataset of 10,479 loans issued by Angolan commercial banks, combined with assumptions regarding loss processes, we demonstrate the practical applicability of the proposed methodology. This approach is particularly relevant for emerging markets with limited access to advanced credit risk modeling infrastructure.

RisksVol. 13(8)
University of Lisbon (PT), Technical University of Angola (AO), Universidade Nova de Lisboa (PT)
Openalex Percentile: Top 72%
Credit Risk and Financial Regulations
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