Elsevier - parative Analysis Of Current Credit Risk.pdf

Journal of Banking & Finance 24 (2000) 59±117
ate/econbase
parative analysis of current credit risk
models q
Michel Crouhy a,*, Dan Galai b, Robert Mark a
a Canadian Imperial Bank merce, Market Risk Management, 161 Bay Street, Toronto, Ont.,
Canada M5J 2S8
b Hebrew University, Jerusalem, Israel
Abstract
The new BIS 1998 capital requirements for market risks allows banks to use internal
models to assess regulatory capital related to both general market risk and credit risk for
their trading book. This paper reviews the current proposed industry sponsored Credit
Value-at-Risk methodologies. First, the credit migration approach, as proposed by JP
Morgan with CreditMetrics, is based on the probability of moving from one credit
quality to another, including default, within a given time horizon. Second, the option
pricing, or structural approach, as initiated by KMV and which is based on the asset
value model originally proposed by Merton (Merton, R., 1974. Journal of Finance 28,
449±470). In this model the default process is endogenous, and relates to the capital
structure of the ®rm. Default occurs when the value of the ®rmÕs assets falls below some
critical level. Third, the actuarial approach as proposed by Credit Suisse Financial
Products (CSFP) with CreditRisk+ and which only focuses on default. Default for
individual bonds or loans is assumed to follow an exogenous Poisson process. Finally,
McKinsey proposes CreditPortfolioView which is a discrete time multi-period model
where default probabilities are conditional on the macro-variables like unemployment,
the level of interest rates, the growth rate in the economy, ... which to a large extent
drive the credit cycle in the economy. Ó 2000 Elsevier Science . All rights reserved.
JEL classi®cation: G21; G28; G13
q This work was partially supported by the Zagagi Center.
* Corresponding author. Tel.: +1-416-594-7380; fax: +1-416-594-8528.
E-mail address: ******@ (M. Crouh