Credit Risk Modelling
From Open Risk Manual
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Contents
Definition
Credit Risk Modelling is the development of models and tools for the assessment and management of Credit Risk. Credt risk modelling is a ubset of Quantitative Risk Management.
Classification
By Aggregation Level
The Credit Risk Modelling domain can be subdivided in two major branches depending on the Risk Aggregation level:
- Individual credit risk assessment of an entity (obligor) such Credit Scoring Models, credit rating models, regulatory models for Risk Parameters or IFRS 9 Models for financial reporting
- Portfolio Risk Models
By Obligor Size
- Retail models addressing individuals (physical persons as opposed to companies)
- SME Lending addressing small and medium sized companies
- Corporate Lending models
By Product Type
- Unsecured Lending
- Collateralized Lending
- Derivatives Exposures
By Business Purpose
Credit risk models enter in a wide variety of contexts:
- Models used to decide on accepting a certain risk (Risk Acceptance)
- Models used to help with internal Credit Risk Management and Credit Portfolio Management
- Models used to estimate regulatory capital under Basel II
- Models used to report financial accounts under IFRS 9
- Models used in Regulatory Stress Testing
By Business Line
Credit risk models vary by the primary business sector they address. Here again there are various possible decompositions