The Benchmark for understanding credit risk
- A value-at-risk (VaR) framework applicable to all
institutions worldwide that carry credit risk in the course of
their business.
- A full portfolio view addressing credit event correlations
which can identify the costs of over concentration and benefits of
diversification in a mark-to-market framework.
- Results that drive: investment decisions, risk mitigating
actions, consistent risk based credit limits, and rational
risk based capital allocations.
This Technical Document describes CreditMetrics, a
framework for quantifying credit risk in portfolios of traditional
credit products (loans, commitments to lend, financial letters of
credit), fixed income instruments, and market driven instruments
subject to counterparty default (swaps, forwards, etc.). This is
the first edition of what we intend will be an ongoing refinement
of credit risk methodologies.
Just as we have done with RiskMetrics, we are making our
methodology and data available for three reasons:
- We are interested in promoting greater transparency of credit
risk. Transparency is the key to effective management.
- Our aim is to establish a benchmark for credit risk
measurement. The absence of a com mon point of reference for credit
risk makes it difficult to compare different approaches to and
measures of credit risk. Risks are comparable only when they are
measured with the same yardstick.
- We intend to provide our clients with sound advice, including
advice on managing their credit risk. We describe the CreditMetrics
methodology as an aid to clients in under standing and evaluating
that advice.
Both J.P. Morgan and our co-sponsors are committed to further
the development of CreditMetrics as a fully transparent set of risk
measurement methods. This broad sponsorship should be interpreted
as a signal of our joint commitment to an open and evolving
standard for credit risk measurement. We invite the participation
of all parties in this continuing enterprise and look forward to
receiving feedback to enhance CreditMetrics as a bench mark for
measuring credit risk.
CreditMetrics is based on, but differs significantly from, the risk
measurement methodology developed by J.P. Morgan for the
measurement, management, and control of credit risk in its trading,
arbitrage, and investment account activities. We remind our
readers that no amount of sophisticated analytics will replace
experience and professional judgment in managing risks.
CreditMetrics is nothing more than a high quality tool for the
professional risk manager in the financial markets and is not a
guarantee of specific results. The benchmark for understanding
credit risk.
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