What Is Credit Risk?
Credit risk is the potential for a loss when a borrower cannot make payments as obligated to a lender. Credit risk is commonly measured and communicated as the likelihood or probability of an individual borrower’s default. Lenders use models such as probability of default (PD), loss given default (LGD), and exposure at default (EAD) to analyze risk, rank customers, and decide on appropriate strategies for managing this risk.
Effective techniques for managing and analyzing risk include:
- Understanding the risk and nature of each counterparty
- Modeling credit scorecards
- Using Monte Carlo simulations to model credit risk based on probability of default or credit migration matrix
- Estimate lifetime expected credit losses for regulatory frameworks such as IFRS9 and CECL
- Mitigating risk using credit derivatives
- Managing complex regulated credit risk model workflows (with Modelscape™)