Credit Value Risk: How to complete the jigsaw
The new regulatory Capital Adequacy Framework does not include Credit Value at Risk (CVaR), nevertheless, more and more banks are implementing credit portfolio models. The market is changing and risk adjusted pricing puts pressure on banks that are not able to accurately calculate the required risk spreads for banking book products. Stefan Staub looks at how the different parts of credit risk fit together.
Economic capital is typically derived from a Credit Portfolio Model and its main output called CVaR. Above all, CVaR is able to measure diversification effects of a portfolio while risk metrics for each transaction need to be input. The measurement of diversification is also the key difference to the improved rules from Basel II. Economic capital serves as a crucial input factor for various essential concepts including risk adjusted pricing as well as risk
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