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...

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...

For banks, credit lines play an important role exposing both liquidity and credit risk. In the advanced internal ratings‐based approach, banks are obliged to use their own estimates of exposure at default using credit conversion factors. For volatile segments, additional downturn estimates are...