Product Insight - Credit Risk Attribution Using RiskMetrics CreditManager - April 2013

Apr 10, 2013

Risk based pricing and performance evaluation rely on a meaningful capital charge for individual exposures.  While the capital statistics produced by complex, simulation-based models might be monotonic in any one parameter, it is not clear how these different parameters interact.  In this paper, we provide a framework for credit risk attribution that isolates the capital assigned to individual obligors according to distinct risk factors.  Utilizing CreditManager, we begin with a scaled-down version of the model that applies the same assumptions as the Basel Internal Ratings-Based (IRB) capital formula.  We then expand the model to incorporate more risk drivers (maturity, pricing and size) arriving finally at the full CreditManager methodology.  At each step, we explain the incremental capital change by fitting a smooth relationship to the new risk driver.  For a bank implementation, regression rules similar to those presented here could define the internal pricing and capital attribution policies.