Study Notes: Measuring Credit Risk

Chapter 6. Credit Risk and Capital Modeling Study Notes contains 28 pages covering the following learning objectives:

* Evaluate a bank’s economic capital relative to its level of credit risk.
* Explain the distinctions between economic capital and regulatory capital, and describe how economic capital is derived.
* Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exposure, and loss rate.
* Define and calculate expected loss (EL).
* Define and explain unexpected loss (UL).
* Estimate the mean and standard deviation of credit losses assuming a binomial distribution.
* Describe the Gaussian copula model and its application.
* Describe and apply the Vasicek model to estimate default rate and credit risk capital for a bank.
* Describe the CreditMetrics model and explain how it is applied in estimating economic capital.
* Describe and use the Euler’s theorem to determine the contribution of a loan to the overall risk of a portfolio.
* Explain why it is more difficult to calculate credit risk capital for derivatives than for loans.
* Describe challenges to quantifying credit risk.

After reviewing the notes, you will be able to apply what you learned with practice questions.

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