This paper first provides a simple but very general framework for credit portfolio modellingwhich is based on the distinction between systematic and unsystematic risk. Unsystematicor borrower-specific risk vanishes through diversification in a very large, infinitelyfine-grained portfolio. The...

Value at risk (VaR) is today the standard tool in risk management for banks and other financial institutions. It is defined as the worst loss for a given confidence level: For a confidence level of e.g. p=99%, one is 99% certain that at the end of a chosen risk horizon there will be no greater...

This paper shows how financial contracts might be redesigned to allow for banks to manage the idiosyncratic component for their own accounts.