VRM 6. Measuring Credit Risk

Learning Objectives

1) Explain the distinctions between economic capital and regulatory capital and describe how economic capital is derived.

2) Describe the degree of dependence typically observed among the loan defaults in a bank’s loan portfolio, and explain the implications for the portfolio’s default rate.

3) Define and calculate expected loss (EL).

4) Define and explain unexpected loss (UL).

5) Estimate the mean and standard deviation of credit losses assuming a binomial distribution.

6) Describe the Gaussian copula model and its application.

7) Describe and apply the Vasicek model to estimate default rate and credit risk capital for a bank.

8) Describe the CreditMetrics model and explain how it is applied in estimating economic capital.

9) Describe and use the Euler’s theorem to determine the contribution of a loan to the overall risk of a portfolio.

10) Explain why it is more difficult to calculate credit risk capital for derivatives than for loans.

11) Describe challenges to quantifying credit risk.