THE BUSINESS APPLICATION
Where and how to use it
Use it to explore concentration, downside tolerance and internal capital planning. Compare alternative portfolio mixes under explicit dependence assumptions before calling a growth strategy diversified.
A lender adds many loans to businesses serving the same local industry. Account count rises, but the portfolio may still share a common shock. The model makes that dependence assumption visible.
From evidence to a decision
- 01Portfolio snapshotExposures and risk estimates
- 02Shared risk factorsRepresent concentration
- 03Simulated outcomesRepeat conditional loss paths
- 04Loss distributionCompare average and tail risk
DATA REQUIREMENTS
What records does it need?
These are the records your team would bring together for this analysis. The exact fields and history needed depend on your lending products, the question you want to answer and the period you want to assess.
| Record category | What it contains | Why the detail matters |
|---|---|---|
| Portfolio exposures | Account or group exposure, PD, LGD and maturity where applicable. | Use a consistent as-of snapshot. |
| Concentration structure | Industry, geography, connected groups and relevant common factors. | Avoid treating related exposures as independent. |
| Dependence assumptions | Supported correlations or factor assumptions, simulation settings. | Distinguish fitted evidence from scenario choices. |
Past loan outcomes help assess how well an estimate reflects your borrowers. For a new decision, use only the information available at that time; later repayments help you review the result afterwards.
Understand data readiness →WHAT YOU RECEIVE
The output
Expected and tail-loss measures, concentration sensitivities and internal-capital comparisons under defined conventions.
WHAT TO WATCH
The limitations
Tail estimates are highly sensitive to dependence and severity assumptions. Internal capital is not automatically regulatory capital.
FOR RISK & ANALYTICAL SPECIALISTSHow the analysis works+
The modelling approach
Conditional factor simulation and transparent baselines generate a loss distribution from exposure, PD, LGD and dependence assumptions. Simulation stability and sensitivity matter as much as the headline tail estimate.
What your risk team should review
Simulation convergence, seed reproducibility, heterogeneous exposures, dependence stress and tail definition.
The right approach depends on your portfolio and available history. Review the fit to your borrowers, the reliability of the estimates and the effect of missing information before using the result in a lending decision.