The aim of this class is to offer you an overview of the approaches we can use to compute the Probability of Default of a counterparty.
It is very important that you spend some time understanding the general scheme in the next pages (and I suggest to print it out), since it will help you a lot to keep in mind the big picture behind the PD, especially when we start filling the details in.

Starting from this class we “abandon” the STA approach, focusing our attention on the more interesting IRB approaches.

Here you can find the slides of this class. Here the script.

And here the scheme you can print.

Please notice: many concepts we introduce in this week (lecture 4) are still related to the STA approach as well. For example, external credit ratings are used in the STA approach to classify balance sheet items before applying the weights for the computation of RWA. Do you remember that?

However, from now on, I repeat, we focus our attention on the IRB approaches, which are the most interesting ones for a credit risk manager willing to be competitive.