• A value-at-risk (VaR) framework applicable to all institutions worldwide that carry credit risk in the course of their business.
• A full portfolio view addressing credit event correlations which can identify the costs of over concentration and benefits of diversification in a mark-to-market framework.
• Results that drive: investment decisions, risk mitigating actions, consistent risk based credit limits, and rational risk based capital allocations.

This Technical Document describes CreditMetrics, a framework for quantifying credit risk in portfolios of traditional credit products (loans, commitments to lend, financial letters of credit), fixed income instruments, and market driven instruments subject to counterparty default (swaps, forwards, etc.). This is the first edition of what we intend will be an ongoing refinement of credit risk methodologies.

Just as we have done with RiskMetrics, we are making our methodology and data available for three reasons:

• We are interested in promoting greater transparency of credit risk. Transparency is the key to effective management.
• Our aim is to establish a benchmark for credit risk measurement. The absence of a com mon point of reference for credit risk makes it difficult to compare different approaches to and measures of credit risk. Risks are comparable only when they are measured with the same yardstick.
• We intend to provide our clients with sound advice, including advice on managing their credit risk. We describe the CreditMetrics methodology as an aid to clients in under standing and evaluating that advice.

Both J.P. Morgan and our co-sponsors are committed to further the development of CreditMetrics as a fully transparent set of risk measurement methods. This broad sponsorship should be interpreted as a signal of our joint commitment to an open and evolving standard for credit risk measurement. We invite the participation of all parties in this continuing enterprise and look forward to receiving feedback to enhance CreditMetrics as a bench mark for measuring credit risk.

CreditMetrics is based on, but differs significantly from, the risk measurement methodology developed by J.P. Morgan for the measurement, management, and control of credit risk in its trading, arbitrage, and investment account activities. We remind our readers that no amount of sophisticated analytics will replace experience and professional judgment in managing risks. CreditMetrics is nothing more than a high quality tool for the professional risk manager in the financial markets and is not a guarantee of specific results. The benchmark for understanding credit risk.