Please enable JavaScript.
Coggle requires JavaScript to display documents.
Credit Risk - Coggle Diagram
Credit Risk
Basic Concept
Loss Given Default (LGD)
LGD represents the magnitude of loss on the exposure, expressed as a percentage
-
-
Many ways to calculate EaD, Basel Standards allow for Current Exposure Method (CEM), Standardized Method, or Internal Model Method
-
Credit Ratings
The process of assessing credit quality (credit analysis) combines quantitative and qualitative approaches.
Conducted internally by banks or externally by rating agencies such as Standard & Poor’s, Moody’s, and Fitch.
Credit ratings are currently the main source for assessing the credit quality of an obligor and the riskiness implied by an investment, but their original purpose was to distinguish between investment grade and noninvestment-grade debt securities.
Ratings indicate the riskiness of credit investments and are expressed in letter grades (AAA, AA, A, BBB, etc.).
-
Default Probabilities
Can be determined from historical data: (real-world probabilities) or Bond prices/Credit Default Swap (CDS): (risk-neutral probabilities)
-
Structural Models
First Passage Models
Extends the Merton framework by allowing default to happen
at intermediate times, even before maturity T
-
Other forms of the first passage model allow for stochastic interest rates, bankruptcy
costs, taxes, debt subordination and more.
CreditMetrics™
-
Value-at-Risk-based methodology for nontraded assets (loans, bonds).
-
Three main steps: (1) Estimation of the credit exposure amount of each obligor in the portfolio. (2) Calculation of the volatility of portfolio value subject to credit quality changes. (3) Calculation of the correlations among obligors and final risk measure.
-
KMV-Merton Approach
-
-
Based directly on economic fundamentals, such as the
capital structure
-
-
Reduced-form Models
-
CreditRisk+™
-
-
Combines loss frequency and loss severity distributions via simulation to obtain a total loss distribution.
-
-
-
Jarrow–Turnbull Model
Based on exogenous default, risk-neutral measures and the
absence of arbitrage.
-
-
-
-