Provision matrix

A provision matrix is a table of provision rates for delinquency buckets, derived from how balances roll between buckets toward loss. The loss rate for a bucket is the product of the roll rates from that bucket onward to loss. Multiply a bucket’s balance by its coefficient to calculate its provision, with the coefficient often incorporating loss given default.

Example

For illustration, suppose the roll rates from 30 days past due through later buckets to loss are 40%, 60% and 80%. The estimated loss rate for that starting bucket is 0.4 × 0.6 × 0.8 = 19.2%, or about 19%.

How roll rates lead to loss

Work out the calculation separately for each starting delinquency bucket. A balance already further along the path to loss has fewer later bucket transitions to pass through.

Use the onward roll rates from that starting bucket in sequence. Multiplying them gives the estimated share of the starting balance that reaches loss.

How each bucket’s provision is calculated

For each bucket, multiply its balance by its coefficient to calculate the provision assigned to that bucket. The coefficient often incorporates loss given default as well as the chance of reaching loss.

Keep the rates current by updating the calculation from the transition matrix being used. The resulting provision depends on the coefficients and balances applied to each bucket.

Questions we get asked

Decisimo’s provision matrix calculator uses a transition matrix to give coefficients for each delinquency bucket and the provision for each bucket.