Credit Portfolio Model

From Open Risk Manual


Credit Portfolio Model denotes any mathematical framework that aims to emulate the evolution of credit systems

Model Types

There is a large variety of possible credit portfolio models reflecting the diversity of both

The following sections expand a number of characteristics that help distinguish the different model categories

Aggregation Level

Credit Risk can be defined and analysed at vastly different levels of aggregation (See Credit Risk Hierarchy for an overview. Credit portfolio models can adopt an aggregated view, modelling (sub)portfolio level performance or individual entity modelling (Loan Level Analysis).

Choices of aggregation level have implications for data availability, modelling options and ability to support various Credit Portfolio Management objectives

Credit Rating System

Use and nature of the Credit Rating System adopted. For example the number and definition of Credit Rating in a Credit Rating Scale.

Credit Market Data

Credit contracts and products may or not be traded in organized markets with implications as to the type and quality of information available about credit risk assessments by market participants. Credit portfolio management of traded credit risk products will typically use credit market information (e.g. observed Credit Spread

Accounting Framework

The accounting framework (e.g. IFRS 9 or CECL) applicable to the entity performing credit portfolio management has significant implications as it defines

  • the credit risk measurement infrastructure that must be in place
  • the type of external reporting that is required (and the incentives for management linked to these reports)

Mathematical Framework

The is a wide range of mathematical modelling choices (dependencies between default events and default / loss correlations). The mathematical nature of the portfolio model is in general linked to the nature of the individual entity credit risk model.

CPM Objectives

Credit portfolio models are used in supporting credit portfolio management objectives and the nature of those objectives dictates to some degree the structure of the modelling of framework, for example

  • whether the framework is able to allocated risk to individual entities
  • the linkage of the framework to liabilities (ALM / Capital Management)

Historical Frameworks

For a period of time prior to the financial crisis a typology of credit portfolio models had formed around three prevalent commercial offerings[1]

  • Moody’s/KMV (MKMV)
  • CreditMetrics
  • CreditRisk+


  1. BCBS, Range of practices and issues in economic capital frameworks, March 2009