Credit Risk Modelling
by Patricia Jackson of the Bank of England,
Introduction Excerpt: Current credit risk modelling and internal grading practice A survey by the FSA into the use of credit risk modelling techniques in the UK found that major banks, like their continental counterparts, had been working to incorporate within their credit risk management processes models that have been published or sold by third parties. The survey, described in a paper by Vyvian Bronk and Emmanuelle Sebton[REF] (Financial Services Authority, UK), noted that credit portfolio modelling was typically confined to certain parts of the asset portfolio. Different techniques were applied to different types of business. For example, "bottom-up" approaches were generally applied to individual large corporate exposures (where information on each corporate was readily available). "Top-down" models tended to be applied to retail credit portfolios, grouping together exposures where there was little information on individual obligors. Models were commonly used to allocate economic capital within business units and as an input to more consistent pricing of certain credit risks. However, the use of models to create an integrated approach to overall credit risk management was rare.
Published in: Financial Stability Review, Issue 6, (June 1999), pp. 94-120.