This paper considers a simple model of credit risk and derives the limit distribution of losses under different … assumptions regarding the structure of systematic risk and the nature of exposure or firm heterogeneity. We derive fat …-tailed correlated loss distributions arising from Gaussian (i.e. non-fat-tailed) risk factors and explore the potential for (and limit …

In theory the potential for credit risk diversifcation for banks could be substantial. Portfolios are large enough that … idiosyncratic risk is diversifed away leaving exposure to systematic risk. The potential for portfolio diversifcation is driven … broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of …