Evaluating Credit Risk Models

Hergen Frerichs and Mark Wahrenburg
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Mark Wahrenburg: University of Frankfurt/Main

A chapter in Risk Management, 2005, pp 219-238 from Springer

Abstract: Abstract The problem how to evaluate and monitor the quality of credit risk models has recently received much attention. The discussions about the inclusion of internal models in the Basel Capital Accord highlight this fact. Basel II does not allow the use of full-scale credit portfolio risk models for regulatory capital calculation because regulators are concerned that model quality cannot be validated accurately enough. However, banks are allowed to use internal credit rating systems although it is by far not clear how accurately their quality may be evaluated. This paper discusses the current state-of-the-art concerning methods and empirical results for validating both credit portfolio risk models and internal credit rating systems. In order to allow for a meaningful assessment of the scope and limits of model validation we closely follow and compare our results to the existing literature on validating market risk models.

Keywords: Credit Risk; Model Validation; Bank Regulation; Basel II (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-540-26993-9_11

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DOI: 10.1007/3-540-26993-2_11

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