Credit Risk Modelling

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