The dependency of the individual default behavior of a firm on the state of the credit cycle is widely implemented in credit portfolio models and ultimately reflected in the Basel II one-factor model determining capital requirements. Despite this, macroeconomic variables able to represent this...

Credit ratings are expert systems which assess the likelihood of a borrower to default. The Basel Accord allows banks to base regulatory capital requirements on the default probability of a rating. Banks must prove that the employed default probabilities are valid estimates. Since in credit risk...