Abstract

The chapter presents the basic CreditRisk+ model along with extensions suggested in the existing literature and proposes some modifications. The purpose of these models is to determine the probability distribution of the losses on a portfolio of loans and other debt instruments so that they could be used for stress testing in the IMF’s Financial Sector Assessment Program, as a benchmark for credit risk evaluations. First, we present the setting and basic definitions common to all the model specifications used in this chapter. Then, we proceed from the simplest model based on Bernoulli-distributed default events and known default probabilities to the full-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 Credit-Risk+ 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.

Contributor Notes

This chapter is an abridged version of IMF Working Paper 06/134 (Avesani and others, 2006).
Author: Ms. Li L Ong