Why is there increasing importance of credit risk modelling?

The increasing importance of credit risk modelling can be attributed to the following three factors: Banks became more concerned for treatment of credit risk. New markets are emerging in credit derivatives and the marketability of existing loans is increasing through securitisation / loan sales market. Regulators are concerned to improve the current system of bank capital requirements especially as it is related to credit risk. Credit Risk Models have assumed importance due to the fact that they provide the decision maker with insight or knowledge that would not otherwise be readily available or that could be obtained at a high cost. In a marketplace where margins are fast disappearing and the pressure to lower pricing is unrelenting, models give their users a competitive edge. Credit risk models are intended to assist banks in quantifying, aggregating and managing risk across geographical and product lines. The outputs of these models also play significant roles in banks' risk management and performance measurement processes, customer profitability analysis, risk based pricing, active portfolio management and capital structure decisions. Credit risk modelling may lead to better internal risk management and may have the potential to be used in the supervisory oversight of banking organisations.