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The extent, to which this risk provision matches with the required risk provision, depends on several factors:
- Quality of macroeconomic parameters - parameters – calibration
- Segmentation criteria that are used to identify deals with similar credit risk. Usually limited to a few criteria because of limited processing capabilities. This results in high risk due to distortions in the ECL calculation, since the credit risks of unequal risk objects are offset against each other and no allocation according to their origin is made. Some transactions are allocated excessively high credit risks, others too little.
- Mathematical approach
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