Rating Models and Validation - Oesterreichische Nationalbank

8.3 EAD Estimation Methods
As in the case of LGD estimation, the initial implementations of EAD estimation
models have primarily used the segmentation approach. CCFs are estimated
on the basis of historical loss data for certain combinations of transactions
and customers (and possibly other segmentation criteria such as the credit term
survived, etc.). The chart below illustrates this point:
Chart 95: Example of Segmentation in CCF Estimation
It is first necessary to collect data on defaulted lines of credit over as long a
time series as possible. In this process, it is important to ensure that loans which
later recovered from default are also included. The percentage drawn at the
time of default is determined for each of these credit facilities. These percentages
are placed on one axis ranging from 0% to the highest observed utilization.
In order differentiate CCFs more precisely, it is possible to segment them
according to various criteria. These criteria can be selected on the basis of either
statistical analyses or theoretical considerations. As an example, the diagram
below shows the distribution of historical utilization rates at default using the
customer type as the segmentation criterion:
Rating Models and Validation
Guidelines on Credit Risk Management 165