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Risk Management Procedure
The goal of the Credit Risk Model is to assess the expected loss for Robinland’s entire portfolio of loans under different portfolio combinations in the near-term future.
We employ the credit risk formula: Expected Loss = Exposure at Default * Probability of Default * Loss Given Default, where:
  • Exposure at Default refers to the value of all assets that are at risk of default
  • Probability of Default refers to the probability that default happens
  • Loss Given Default refers to the percentage of the asset that will be lost if default happens
We first apply the above formula to each hypothetical individual loan, and then simulate a number of different scenarios of our portfolio allocation (i.e. at a given point in time, how many senior secured loans, how many equity pledge loans, how many preferred equity loans we have on our portfolio), and finally sum the expected default across all loans in a hypothetical portfolio to obtain total expected loss given that portfolio, and take the max across all portfolio to obtain a final estimate of the highest potential expected loss. We do the same using the 95th percentile of the expected loss, to obtain a more conservative estimate. When using the latter, we got $102k, which is much lower than our $200k reserve fund.
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