Keeping an eye on the long-term
Setting risk limits is always tricky, but the problems associated with measuring credit risk make creating meaningful credit risk limits even more difficult. For market risk limits, many companies use a limit based on value-at-risk (Var). This limit is used to control the maximum amount of acceptable market risk.
However, if a company applies the same methodology to its credit portfolio, it may be in for an unpleasant surprise. To understand why, let us define a number of
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