Understanding Models in SAS Allowance for Credit Loss
Credit loss models are essential tools for evaluating expected credit losses. One such model is the ACL Curves model template, which is based on a curve methodology. This model evaluates credit losses when the Loss Ratio (LR) curve or the Probability of Default (PD) and the Loss-Given-Default (LGD) curves are provided. In addition, prepayment (PP) is also considered through a curve methodology.
Loss Ratio (LR) Curve: The Loss Ratio curve represents the ratio of losses to the total exposure at default. This curve is used to estimate expected credit losses.
Probability of Default (PD): The Probability of Default curve represents the likelihood that a borrower will default on a loan. This curve is used in conjunction with the Loss-Given-Default curve to estimate expected credit losses.
Loss-Given-Default (LGD): The Loss-Given-Default curve represents the percentage of loss that a lender is likely to incur in the event of a default. This curve is used in conjunction with the Probability of Default curve to estimate expected credit losses.
SAS Allowance for Credit Loss uses SAS Risk Engine to execute your credit loss models.
What is SAS Risk Engine?
SAS Risk Engine runs risk calculations and aggregates results over an in-memory grid. What this means is that the software can handle complex calculations very quickly and store large volumes of results. With SAS Risk Engine, you have the flexibility to configure new instruments, develop new pricing functions, add new risk factors, and create scenarios as needed. Risk Engine lets you conduct complex analyses of very large portfolios. And the results are held in memory so that you can explore them immediately.
SAS Risk Engine gives you a lot of options when it comes to data sources and programming languages. Data sources can be on-premises or in the cloud, such as relational databases and unstructured data. And, you can manage data and create analytical models using a variety of languages including R, Python, Lua, and of course, SAS. As for transparency, the risk environment configuration is transparent. Risk Engine is an open platform accessible via SAS APIs.
Models are executed within Risk Pipelines where SAS Risk Engine can take the the model you supplied, your data (portfolio), risk factors, and functions and performs the calculations for your requested output variables like expected credit loss.
The action is done from with SAS Allowance for Credit Loss user interface when you run the Credit Risk Analysis task.
You can add a model through the SAS Risk Engine user interface by building a risk pipeline.
This pipeline will include your model code as well as the following objects if needed:
- pre-model code
- pre-actions code
- post-actions code
- post-model code
An example can be seen on the right.
You can also add your model code within SAS Allowance for Credit Loss. You would need to do the following:
- create new model
- provide the model details
- select SAS as the Engine
- in the CODE tab, you can enter your SAS model code.
Screen shots can be seen below.
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Credit loss models, such as the ACL Curves model template, provide valuable insights into expected credit losses by utilizing curve methodologies. Understanding the Loss Ratio, Probability of Default, and Loss Given Default curves is essential for accurately evaluating credit risk. SAS Allowance for Credit Loss allows you options to enter your model code so it can be executed within SAS Risk Engine. If you would like to learn more about the SAS Allowance for Credit Loss or SAS Risk Engine solutions, please use the SAS Risk Learning Subscription to find the associated course material.
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