As Covid snaps credit models, lenders turn to stress-testing

Banks enlist scenario analysis to bolster creaking default models

Credit risk models are buckling under the strain of coronavirus, and banks are scrambling to fix or replace them. The models, which help lenders compute parameters such as probability of default (PD) and loss given default (LGD), lose their predictive power when faced with the kind of unique economic circumstances that are buffeting markets and companies during the pandemic crisis.

In the absence of credible inputs for standard models, banks are getting creative. They’re repurposing methods

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