Credit Risks

Credit risks describe possible losses resulting from a deterioration in the creditworthiness of a debtor, which includes in the worst case its default. One risk parameter for measuring credit risk is the Probability of Default (PD) within a certain period of time (often within 1 year). The convention is that a debt obligation is considered to be in default if the debtor is more than 90 days in arrears with the loan obligation and it is unlikely that the debtor will repay the debt. There are various approaches for determining default probabilities. One approach is based on external and internal ratings, while other approaches are based on Merton’s model, one of the best-known models in credit risk modelling.