Credit Risk Modelling
From Open Risk Manual
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
