Credit risk: estimating loss frequencies and loss

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Lending to various companies and individuals is a core business of banks. This lending activity comes with credit risk, namely the risk that some borrowers default and fail to make required payments. Estimating credit risk accurately is important for banks' risk management. In this project, we improve the modelling of the dependence between loss frequency and loss rate of defaulting customers. The reason for the dependence comes from the underlying economic cycle: in an economic downturn, losses occur both more frequently and more severely than in an economic boom. Our proposed modelling for this dependence structure between loss frequency and loss rate will help estimate credit risk more accurately and thus determine capital requirements more precisely.