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

Author

Listed:
  • Kexue Liu
  • Jean Salvati
  • Mr. Renzo G Avesani
  • Mr. Alin T Mirestean

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.

Suggested Citation

  • Kexue Liu & Jean Salvati & Mr. Renzo G Avesani & Mr. Alin T Mirestean, 2006. "Review and Implementation of Credit Risk Models of the Financial Sector Assessment Program (FSAP)," IMF Working Papers 2006/134, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2006/134
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    References listed on IDEAS

    as
    1. Gordy, Michael B., 2002. "Saddlepoint approximation of CreditRisk+," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1335-1353, July.
    2. 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.
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    Cited by:

    1. Mr. Martin Cihak, 2007. "Introduction to Applied Stress Testing," IMF Working Papers 2007/059, International Monetary Fund.
    2. Jose Giancarlo Gasha & Mr. Andre O Santos & Mr. Jorge A Chan-Lau & Mr. Carlos I. Medeiros & Mr. Marcos R Souto & Christian Capuano, 2009. "Recent Advances in Credit Risk Modeling," IMF Working Papers 2009/162, International Monetary Fund.
    3. International Monetary Fund, 2009. "Cyprus: Financial Sector Assessment Program Update: Technical Note: Measuring Banking Stability in Cyprus," IMF Staff Country Reports 2009/171, International Monetary Fund.
    4. Vazquez, Francisco & Tabak, Benjamin M. & Souto, Marcos, 2012. "A macro stress test model of credit risk for the Brazilian banking sector," Journal of Financial Stability, Elsevier, vol. 8(2), pages 69-83.
    5. M. Naresh Kumar & V. Sree Hari Rao, 2015. "A New Methodology for Estimating Internal Credit Risk and Bankruptcy Prediction under Basel II Regime," Computational Economics, Springer;Society for Computational Economics, vol. 46(1), pages 83-102, June.
    6. Mr. Mark Swinburne & Stéphanie Marie Stolz & Ms. Marina Moretti, 2008. "Stress Testing at the IMF," IMF Working Papers 2008/206, International Monetary Fund.

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    Keywords

    WP; least squares;

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