European credit model outputs vary wildly

Risk densities range widely and out-of-sync with average probabilities of default

The ratio of risk-weighted assets to corporate credit exposures, as calculated by banks’ internal models, differs enormously from firm to firm, Risk Quantum analysis shows. 

A survey of 16 European banks reveals that the risk density of corporate loan books – calculated as RWAs divided by exposures-at-default (EAD) – as determined by each firm’s advanced internal ratings-based approach (A-IRB) models, ranged from 33% to 55% at end-2017.

Risk-weighted assets are used to set banks’ minimum

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