Credit risk contagion

In a recession, company defaults increase due to both the worsening economic environment and the specific links between customers and suppliers. Banks intuitively know that customer default can cause supplier default. Duncan Martin and Chris Marrison provide analytical support for this intuition with a simple extension of the Merton portfolio model

Current approaches to credit risk modelling typically explain correlation between companies by their exposure to common macroeconomic and financial risk factors. However, this explanation must be incomplete as common sense tells us that a credit event at one company affects the solvency of related companies directly. This effect is known intuitively by risk managers and regulators, which is why they track the interconnectedness of the companies they oversee. In this article, we suggest a way of

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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