We survey both academic and proprietary models to examine how macroeconomic and systematic risk effects are incorporated into measures of credit risk exposure. Many models consider the correlation between the probability of default (PD) and cyclical factors.(...)

Banks have access to different markets for credit risk transfer (CRT), including the credit derivative and the secondary loan markets. We investigate how and why a bank chooses among these markets to hedge the credit risk of a loan. We find that banks with capital and liquidity constraints are...