The theory and practice of credit risk modelling

Abstract

This chapter reviews models that quantify credit decision making. The first set of models is models of standalone credit risk that attempt to assess credit risk at the firm or individual borrower level. These models include expert and credit rating systems. The second set of models is models of portfolio credit risk that measure credit risk at the portfolio level, including structural models, explicit factor models, and reduced form models. Each model has its own strengths and weaknesses and it is therefore useful to be aware of these in their chosen context.