Review and Implementation of Credit Risk Models of the Financial Sector Assessment Program

by Renzo G. Avesani of the International Monetary Fund,
Kexue Liu of the International Monetary Fund,
Alin Mirestean of the International Monetary Fund, and
Jean Salvati of the International Monetary Fund

May 2006

Abstract: The paper presents the basic CreditRisk+ model, and proposes some modifications. This model could be useful in the stress-testing financial sector assessments process as a benchmark for credit risk evaluations. First, we present the setting and basic definitions common to all the model specifications used in this paper. Then, we proceed from the simplest model based on Bernoulli-distributed default events and known default probabilities to the fully-fledged CreditRisk+ implementation. The latter is based on the Poisson approximation and uncertain default probabilities determined by mutually independent risk factors. As an extension we present a CreditRisk+ specification with correlated risk factors as in Giese (2003). Finally, we illustrate the characteristics and the results obtained from the different models using a specific portfolio of obligors.

JEL Classification: G11, G20, G21, C60, C63.

Keywords: portfolio credit risk, default probabilities, Poisson distribution, Bernoulli distribution.

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