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Customers and Markets: Both Are Essential to Credit Risk Measurement in Australian Banks

2011
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Article Description

This paper compares credit models that incorporate a market component to those that are solely customer based. We found that customer-only models understated credit risk during the Global Financial Crisis (GFC) and do not adequately differentiate between industries. Models that focus too heavily on the market can overstate credit risk in times of high volatility. We recommend a two-factor modelling approach that incorporates both customer and market risk to improve the accuracy of credit-risk measurement as well as assist lenders with early risk detection.

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