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

_IMF Working Papers, May 1, 2006_

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## Bibliographic details
- Authors: Kexue Liu, Jean Salvati, Renzo G Avesani, Alin T Mirestean
- Published: May 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863949.001

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### Summary and purpose
- Presents the basic Credit Risk+ model and proposes modifications.
- Positions the model as a benchmark for credit risk evaluations in stress-testing financial sector assessments.
- Outlines a progression from simple to fully-fledged model specifications to illustrate methodological development and applicability.

### Model specifications and methodological progression
- Begins with the setting and basic definitions common to all model specifications used in the paper.
- Simple model:
  - Based on Bernoulli-distributed default events.
  - Assumes known default probabilities.
- Full Credit Risk+ implementation:
  - Based on the Poisson approximation.
  - Incorporates uncertain default probabilities determined by mutually independent risk factors.
- Extension:
  - Presents a Credit Risk+ specification with correlated risk factors as in Giese (2003).

### Illustrations and empirical application
- Uses a specific portfolio of obligors to illustrate:
  - Characteristics of different models.
  - Results obtained from the Bernoulli-based model, the Poisson-approximation Credit Risk+ implementation, and the correlated risk-factor extension.

### Key findings and implications for FSAP stress-testing
- Credit Risk+ and its variants can serve as useful benchmarks in stress-testing exercises for the financial sector.
- Modeling choices (Bernoulli vs. Poisson approximation; independent vs. correlated risk factors) materially affect loss distribution characteristics and stress-test outcomes.
- Introducing uncertainty in default probabilities and allowing for factor correlation (per Giese (2003)) provides richer risk dynamics relevant for assessment exercises.

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## Content in this bundle

- **8. Model 4: Correlated Sectors, Inter-Sector Covariance = 0.2**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/review-and-implementation-of-credit-risk-models-of-the-financial-sector-assessment-program-19111_