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Credit risk modelling
Credit risk modelling refers to the use of financial models to estimate losses a firm might suffer in the event of a borrower’s default. Financial institutions deploy models that draw upon the credit history of borrowers, third-party data – such as rating agency data – and inputs from their own economic stress scenarios to measure credit risk.
Credit risk capital modelling refers to the use of these models to gauge minimum requirements to set aside as a buffer against such losses. Banks permitted to use this family of approaches must measure two components: a borrower’s probability of default, and the bank’s own loss given default. The results help banks allocate loss provisions and set regulatory capital, among other uses.
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