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The Correlated Recovery Model in CreditManager

We introduce the new Correlated Recovery Model of CreditManager, and present various case studies to show that this model is able to account for the additional risk originating from the dependence of recovery rates on market conditions. We illustrate how risk numbers respond to non-zero Recovery R-squared values by examining homogeneous, small inhomogeneous, and large diversified portfolios mimicking our typical European banking clients’ holdings, and argue that, in light of the 2008 crisis, the increased Economic Capital requirements suggested by the model are justifiable.