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Modeling Credit RiskCredit risks (2): Credit-VaRCredit-VaR and Operational Methods for Credit RiskCredit risks Management

In: Capital Market Finance

Author

Listed:
  • Patrice Poncet

    (ESSEC Business School)

  • Roland Portait

    (ESSEC Business School)

Abstract

Section 29.1 presents the generic principle for determining the Credit-VaR inherited from the VaR, and Sect. 29.2 describes the empirical methods based on observed migration frequencies and credit spreads which inform on a debtor’s credit worthiness. Given the theoretical and practical limitations of these methods, Sects. 29.3 and 29.4 introduce analytical methods, based in particular on structural models (Merton, Vasicek, or Kealhofer), which are used both for determining the probabilities of default and migration of the securities and for their valuation. Section 29.5 presents the calculation of the capital required to cover the credit risk of a portfolio or balance sheet using the concept of Unexpected Loss (UL). Section 29.6 shows how these methods fit into the banks’ prudential framework, describes the rules applied to the determination of a bank’s minimum capital and liquidity and the current Basel 3 dispositions.

Suggested Citation

  • Patrice Poncet & Roland Portait, 2022. "Modeling Credit RiskCredit risks (2): Credit-VaRCredit-VaR and Operational Methods for Credit RiskCredit risks Management," Springer Texts in Business and Economics, in: Capital Market Finance, chapter 29, pages 1221-1277, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-84600-8_29
    DOI: 10.1007/978-3-030-84600-8_29
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