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Calculating credit limits with the one-factor asset model
Journal of the Korean Data & Information Science Society 2018;29:1061-75
Published online July 31, 2018
© 2018 Korean Data and Information Science Society.

Kwangyee Ko1 · Jangsun Baek2

12Department of Statistics, Chonnam National University
Correspondence to: Professor, Department of Statistics, Chonnam National University, Gwangju 61186, Korea. E-mail: jbaek@jnu.ac.kr
Received July 3, 2018; Revised July 12, 2018; Accepted July 16, 2018.
This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/3.0) which permits unrestricted non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abstract
In the current credit-risk system, a company's credit quality can be evaluated by a credit rating, but this does not determine its credit quantity. We define a firm's credit quantity as the firm's credit limit that can be provided to the firm based on the value of the firm's assets. Our purpose in this paper is to prevent an abnormal increase in credit exposure by managing a firm's total loan amount (TLA) within the credit limit granted based on the firm's asset value. We propose a one-factor asset model instead of the Merton's asset model and estimate the credit limit corresponding to the firm's credit rating from the one-factor asset model. We also developed a credit limit system with five credit limit grades based on estimates of credit limits to effectively apply credit limit policies to risk management. We show that reasonable credit limit management can substantially reduce the losses of financial institutions through empirical results.
Keywords : Asset value, credit limit, Merton's asset model, one-factor option pricing model, total loan amount.