Abstract
Financial institutions are interested in loss protection and loan insurance. Thus determining the loss reserves needed to cover the risk stemming from credit portfolios is a major issue in banking. By charging risk premiums a bank can create a loss reserve account which it can exploit to be shielded against losses from defaulted debt. However, it is imperative that these premiums are appropriate to the issued loans and to the credit portfolio risk inherent to the bank. To determine the current risk exposure it is necessary that financial institutions can model the default probabilities for their portfolios of credit instruments appropriately. To begin with, these probabilities can be viewed as independent but it is apparent that it is plausible to drop this assumption and to model possible defaults as correlated events.
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Borak, S., Härdle, W.K., López-Cabrera, B. (2013). Portfolio Credit Risk. In: Statistics of Financial Markets. Universitext. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-33929-5_18
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DOI: https://doi.org/10.1007/978-3-642-33929-5_18
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