Credit Risk Modelling in Financial Intermediaries During the 2007-2009 Financial Crisis

Abstract

The 2007-2009 financial crisis exposed significant flaws in financial intermediaries, emphasising the urgent need for strong credit risk modelling. This dissertation investigates the challenges of credit risk management during this tumultuous period, focusing on the methodology used, the analysis performed, and the lessons learnt. It analyses and critiques flaws in the credit risk models used by financial intermediaries, which contributed to the increase in defaults the subsequent economic collapse. Key research concerns addressed include the significance of credit risk models in the crisis, their limits in estimating subprime mortgage risk, and the improvements required to better capture systemic risk elements. This study uses a mixed-methods approach, combining a comprehensive literature review with quantitative analysis of macroeconomic and loan performance data, sources include government economic statistics and loan origination information. To improve the resilience of credit risk models, the research combines and broader economic aspects. The findings identify key shortcomings in the models employed during the crisis and offer changes to increase their effectiveness in risk prediction and management. The study identifies credit risk exposure patterns and trends by evaluating historical data from multiple financial intermediaries. Finally, this dissertation gives essential insights into risk management and financial stability, as well as practical recommendations for policymakers and financial practitioners to help minimize future crises.