Credit Risk
Estimate expected and unexpected credit losses using the Vasicek Single-Factor model
A simulation that estimates the expected and unexpected credit losses across a loan portfolio. Using the Vasicek Single-Factor model, it simulates how many borrowers are likely to default under different economic conditions, and how much the lender stands to lose after accounting for recovered amounts.
Answer the question: "Across all our loans, how much could we realistically lose to defaults — and how much capital should we hold as a buffer against worst-case scenarios?"
Data — What data do you need
| Field | Power BI field / example | Description |
|---|---|---|
| Borrower / Loan ID | LOAN-001, LOAN-002 | Unique identifier for each borrower or loan — one output row per loan. |
| Exposure at Default (EAD) | Sum of EAD | Total outstanding balance at risk if this borrower defaults (e.g. $500K, $1.2M). |
| Default Probability (PD) | Sum of PD | Probability this borrower defaults, as a decimal (e.g. 0.02 = 2%). |
| Recovery Rate | Sum of RecoveryRate | Fraction of EAD expected to be recovered after default (e.g. 0.40 = 40% recovery → Loss Given Default = 60%). |
Use Case — Capital Reserve Calculation for a Retail Loan Portfolio
Scenario: A credit risk officer at a bank has a retail loan portfolio of 500 borrowers. Each loan has a known PD, EAD, and recovery rate from the bank's internal credit scoring model. The officer needs to calculate expected credit losses (ECL) and the P99 unexpected loss — to determine how much regulatory capital to hold.
Configuration:
- ▸Problem Type: Credit Risk
- ▸Borrower / Loan ID: LoanID
- ▸Exposure at Default (EAD): Sum of EAD
- ▸Default Probability (PD): Sum of PD (0–1 decimal)
- ▸Recovery Rate: Sum of RecoveryRate (0–1 decimal)
Sample output — Expected Credit Loss (ECL) and Unexpected Loss (UL) per loan:
| Loan ID | EAD | PD | Recovery Rate | ECL (Expected) | UL P95 | UL P99 |
|---|---|---|---|---|---|---|
| LOAN-001 | $500K | 2.0% | 40% | $6,000 | $38,400 | $71,200 |
| LOAN-002 | $1.2M | 5.5% | 35% | $42,900 | $198,600 | $312,400 |
| LOAN-003 | $800K | 1.2% | 50% | $4,800 | $28,800 | $52,000 |
| LOAN-004 | $2.5M | 8.0% | 30% | $140,000 | $612,500 | $938,000 |
| Portfolio | $5.0M | — | — | $193,700 | $878,300 | $1,373,600 |
