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Credit Risk ManagementBasic Concepts: Financial Risk Components, Rating Analysis, Models, Economic and Regulatory Capital$
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Tony Van Gestel and Bart Baesens

Print publication date: 2008

Print ISBN-13: 9780199545117

Published to Oxford Scholarship Online: January 2009

DOI: 10.1093/acprof:oso/9780199545117.001.0001

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Portfolio models for credit risk

Portfolio models for credit risk

(p.273) 5 Portfolio models for credit risk
Credit Risk Management

Tony Van Gestel

Bart Baesens

Oxford University Press

This chapter discusses portfolio models. The main components of the risk of a single loan, exposure at default, loss given default and probability of default, impact on an aggregated level the portfolio loss distribution are explained in Section 5.2. Common measures of portfolio risk are reviewed in Section 5.3. Section 5.4 illustrates the impact of concentration and correlation on portfolio risk measures. Portfolio model formulations are reviewed conceptually in Section 5.5 and an overview of the current industry models is given in Section 5.6. Some of these models also include the risk of changing interest rates and spreads. The Basel II portfolio model for regulatory capital calculation is explained in detail in Section 5.7. Application and implementation issues are reviewed in Section 5.8. The concepts of economic capital calculation and allocation are summarized in Section 5.9 and a survey of risk-adjusted performance measures is given.

Keywords:   portfolio models, loss distribution, portfolio risk, Basel II, economic capital, capital allocation

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