A comparative analysis of current credit risk models

Abstract

journal of banking & finance 24 (2000) 59–117 www.elsevier.com/locate/econbase a comparative analysis of current credit risk models q michel crouhy a,*, dan galai b, robert mark a a canadian imperial bank of commerce, 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 firm. default occurs when the value of the firm(cid:213)s 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 …

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