The areas of risk management are becoming more and more complicated day by day. With these complexities, there is an ever increasing demand for successful risk management techniques and methodologies. The credit risk modeling helps to build a structure for effective credit risk management. The banks and financial institutions all over the world are attempting to model the credit risk which involves the application of mathematical techniques in quantifying the risk. The article initiates the importance and application of credit risk modeling.
When there are unexpected changes in the credit quality of the counterparties in a financial agreement, the distribution of financial losses is known as credit risk. It includes in addition to defaults, the chance of downgrades in the credit rating of financial instruments. This is based on a probability distribution of defaults. Various models have been developed over time to accurately estimate the probability of default, or in other words, the credit risk.
Most of the banks and financial institutions are realizing the benefit of credit risk management. Models of credit risk management help the credit manager or risk manager project the risk, measure the profitability and find out new business opportunities. The success of any credit risk management model depends on sound design, intelligent implementation and responsible application of the model. |
