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Credit risk

About: Credit risk is a research topic. Over the lifetime, 18595 publications have been published within this topic receiving 382866 citations.


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Posted Content
TL;DR: In this article, a Merton-style threshold-value model for the default probability is proposed, which treats the asset value of a firm as unknown and uses a factor model instead.
Abstract: The main challenge of forecasting credit default risk in loan portfolios is forecasting the default probabilities and the default correlations. We derive a Merton-style threshold-value model for the default probability which treats the asset value of a firm as unknown and uses a factor model instead. In addition, we demonstrate how default correlations can be easily modeled. The empirical analysis is based on a large data set of German firms provided by Deutsche Bundesbank. We find that the inclusion of variables which are correlated with the business cycle improves the forecasts of default probabilities. Asset and default correlations depend on the factors used to model default probabilities. The better the point-in-time calibration of the estimated default probabilities, the smaller the estimated correlations. Thus, correlations and default probabilities should always be estimated simultaneously.

124 citations

Patent
22 Jun 2001
TL;DR: In an anonymous trading system, credit between counterparties is effectively increased by netting buy and sell trades to reflect the true risk to which each party is exposed as mentioned in this paper, and the credit limits are adjusted accordingly.
Abstract: In an anonymous trading system, credit between counterparties is effectively increased by netting buy and sell trades to reflect the true risk to which each party is exposed. Credit limits are adjusted by calculating the exposure in each currency at the relevant time and then converted into the credit limit currency equivalent. The credit limits are adjusted accordingly. The resulting credit limits may be different for bids and offers by or from a given counterparty.

124 citations

Journal ArticleDOI
TL;DR: In this article, the authors show that both scenarios are possible depending on whether markets and contracts are complete or incomplete, and that the concentration of risk that may result from this could increase systemic risk.
Abstract: Historically, much of the banking regulation that was put in place was designed to reduce systemic risk. In many countries capital regulation in the form of the Basel agreements is currently one of the most important measures to reduce systemic risk. In recent years there has been considerable growth in the transfer of credit risk across and between sectors of the …nancial system. In particular there is evidence that risk has been transfered from the banking sector to the insurance sector. One argument is that this is desirable and simply re‡ects diversi…cation opportunities. Another is that it represents regulatory arbitrage and the concentration of risk that may result from this could increase systemic risk. This paper shows that both scenarios are possible depending on whether markets and contracts are complete or incomplete.

123 citations

Journal ArticleDOI
TL;DR: In this paper, the authors examined whether credit analysts utilize the information contained in the difference between book and taxable income in analyzing a firm's credit risk and found that large negative changes in book-tax differences result in less favorable rating changes, consistent with these changes signaling decreased earnings quality.
Abstract: This paper examines whether credit analysts utilize the information contained in the difference between book and taxable income in analyzing a firm's credit risk. Increased book-tax differences may be informative for credit rating agencies as they may signal decreased earnings quality or changes in the firm's off-balance sheet financing. Results suggest a significant negative association between positive changes in book-tax differences and ratings changes. This evidence is consistent with large positive changes in book-tax differences signaling decreased earnings quality and/or increased off-balance sheet financing. We also find that large negative changes in book-tax differences result in less favorable rating changes, consistent with these changes signaling decreased earnings quality. In additional analyses, we find that the association between changes in book-tax differences and rating changes is attenuated for high tax planning firms (e.g., where book-tax differences more likely reflect tax planning than decreased earnings quality).

123 citations

Posted Content
TL;DR: In this paper, the authors discuss the importance of filling existing information gaps on cross-market, cross-currency, and cross-country linkages to refine analyses of systemic linkages.
Abstract: The rise in the complexity and globalization of financial services has contributed to stronger interconnections or linkages. While more extensive linkages contribute to economic growth by smoothing credit allocation and allowing greater risk diversification, they also increase the potential for disruptions to spread swiftly across markets and borders. In addition, financial complexity has enabled risk transfers that were not fully recognized by financial regulators or by institutions themselves, complicating the assessment of counterparty risk, risk management, and policy responses. Thus the importance of assessing the systemic implications of financial linkages.This chapter illustrates the type of methodologies that can provide some prospective metrics to facilitate discussions on systemic linkages and, specifically, the “too-connected-to-fail” problem, thereby contributing to enhanced systemically focused surveillance and regulation. Though these methodoloies have limitations, together they represent a set of valuable surveillance tools and can form the basis for policies to address the too connected- to-fail problem, specifically in two areas:• Perimeter of regulation. To maintain an effective perimeter of prudential regulation without stifling innovation, the tools provided in the chapter could help address questions such as whether to limit an institution’s exposures, the desirability of capital surcharges based on systemic linkages, and the merits of additional liquidity regulations.• Information gaps. The chapter also discusses the importance of filling existing information gaps on cross-market, cross-currency, and cross-country linkages to refine analyses of systemic linkages. Closing information gaps would require improved data collection procedures and impose additional demands on financial institutions, but would be a far better alternative to waiting until a crisis ensues to obtain information as events unfold.

123 citations


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Performance
Metrics
No. of papers in the topic in previous years
YearPapers
20251
2023343
2022729
2021799
2020915
2019921