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Evaluating Credit Risk Models

In: Risk Management

Author

Listed:
  • Hergen Frerichs
  • Mark Wahrenburg

    (University of Frankfurt/Main)

Abstract

The problem how to evaluate and monitor the quality of credit risk models has recently received much attention. The discussions about the inclusion of internal models in the Basel Capital Accord highlight this fact. Basel II does not allow the use of full-scale credit portfolio risk models for regulatory capital calculation because regulators are concerned that model quality cannot be validated accurately enough. However, banks are allowed to use internal credit rating systems although it is by far not clear how accurately their quality may be evaluated. This paper discusses the current state-of-the-art concerning methods and empirical results for validating both credit portfolio risk models and internal credit rating systems. In order to allow for a meaningful assessment of the scope and limits of model validation we closely follow and compare our results to the existing literature on validating market risk models.

Suggested Citation

  • Hergen Frerichs & Mark Wahrenburg, 2005. "Evaluating Credit Risk Models," Springer Books, in: Michael Frenkel & Markus Rudolf & Ulrich Hommel (ed.), Risk Management, edition 0, pages 219-238, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-26993-9_11
    DOI: 10.1007/3-540-26993-2_11
    as

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