Abstract
This chapter analyses the credit losses of 200 bank customers. The bank has classified the customers into eight credit rating categories, starting with 1 – Normal to 8 – Default, with associated default probabilities, which are empirically calculated as average values from historical data collected. Every customer begins a year in a certain credit rating category, with a certain amount of credit exposure at default. By the end of the year, each customer has either defaulted or not. In case of default, the percentage that can be recovered is uncertain. A stochastic model is applied to calculate the total loss amount from those customers and the percentage lost, which is the total loss percentage of the total amount of exposure at default. Also, it applies functions at several confidence levels to find the amounts of reserve required to be confident in covering the losses.
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