Review and Implementation of Credit Risk Models of the Financial Sector Assessment Program (FSAP)

Author/Editor:

Kexue Liu ; Jean Salvati ; Renzo G Avesani ; Alin T Mirestean

Publication Date:

May 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper presents the basic Credit Risk+ model, and proposes some modifications. This model could be useful in the stress-testing financial sector assessments process as a benchmark for credit risk evaluations. First, we present the setting and basic definitions common to all the model specifications used in this paper. Then, we proceed from the simplest model based on Bernoulli-distributed default events and known default probabilities to the fully-fledged Credit Risk+ implementation. The latter is based on the Poisson approximation and uncertain default probabilities determined by mutually independent risk factors. As an extension we present a Credit Risk+ specification with correlated risk factors as in Giese (2003). Finally, we illustrate the characteristics and the results obtained from the different models using a specific portfolio of obligors.

Series:

Working Paper No. 2006/134

Subject:

Credit Credit risk Vector autoregression

English

Publication Date:

May 1, 2006

ISBN/ISSN:

9781451863949/1018-5941

Stock No:

WPIEA2006134

Pages:

35

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