How Much Credit in Credit Risk Models?

by Gary van Vuuren of Fitch Ratings,
Krishnan Ramadurai of Fitch Ratings,
Greg M. Gupton of Fitch Ratings, QR,
Eileen Fahey of Fitch Ratings,
Ian Linnell of Fitch Ratings,
David Marshall of Fitch Ratings,
Kim Olson of Algorithmics, Inc., and
Diane Reynolds of Algorithmics, Inc.

May 8, 2007

Executive Summary:  This paper addresses the role of credit risk within internal economic capital models in assessing risk appetite and capital adequacy in Fitch's assignment of credit ratings. Other papers addressing related issues such as the role of market, operational risks individually and in combination with credit risk in the context of economic capital models will follow.

Regulatory capital requirements are minimum capital requirements. The amount of capital retained in excess of regulatory requirements will materially influence the credit rating assigned.
This paper outlines characteristics needed in order to place material reliance on their outcome.

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