Issues in the Validation of Wholesale Credit Risk Models

This chapter examines wholesale credit risk models and their validation at US banking institutions. The most common practice in wholesale credit risk modeling for loss estimation among large US banking institutions today is to use expected loss models, typically at the loan level. The chapter discusses the quantification and validation of three key risk parameters in this modeling approach, namely, probability of default (PD), loss given default (LGD), and exposure at default (EAD).