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

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Author Info

  • Kexue Liu
  • Jean Salvati
  • Renzo G. Avesani
  • Alin Mirestean
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    Abstract

    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.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/134.

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    Length: 35
    Date of creation: 01 May 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/134

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    Related research

    Keywords: Financial sector; Economic models; probabilities; credit risk; probability; equation; probability distribution; monte carlo simulation; random variable; covariance; computation; standard deviations; poisson distribution; correlation; random variables; polynomial; generating function; characteristic function; gamma distribution; polynomials; monte carlo simulations; probability distributions; risk modeling; estimation method; poisson distributions; generating functions; risk management; cumulative distribution function; financial systems; logarithm; risk measure; risk profile; supervisory framework; risk portfolio; standard deviation; equations; least squares method; supervisory authorities; linear system;

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    References

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    1. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
    2. Gordy, Michael B., 2002. "Saddlepoint approximation of CreditRisk+," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1335-1353, July.
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    Cited by:
    1. Francisco Vazquez & Benjamin M. Tabak & Marcos Souto, 2010. "A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector," Working Papers Series 226, Central Bank of Brazil, Research Department.
    2. Mark Swinburne & Stéphanie Marie Stolz & Marina Moretti, 2008. "Stress Testing At the IMF," IMF Working Papers 08/206, International Monetary Fund.
    3. Jose Giancarlo Gasha & Andre Santos & Jorge A. Chan-Lau & Carlos I. Medeiros & Marcos Souto & Christian Capuano, 2009. "Recent Advances in Credit Risk Modeling," IMF Working Papers 09/162, International Monetary Fund.
    4. Martin Cihák, 2007. "Introduction to Applied Stress Testing," IMF Working Papers 07/59, International Monetary Fund.

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