Compute expected loss, per-segment RAROC and compare stress scenarios for your credit portfolio. Free, no signup needed.
Advanced simulator
Do I approve, review or reject each segment?
Decide whether to approve, review or reject each segment. The tool turns default probability and expected loss into a concrete operating policy.
Portfolio segments
Each row is a segment with default probability (PD), loss given default (LGD) and rate.
Segment
# accounts
Avg. exposure
Default probability (PD)
Loss if default (LGD)
Annual rate (APR)
Life (yrs)
DPD
Stage
Rating
Policy & funding
Cross-cutting parameters of your credit operation.
Pricing & funding
Capital (Basel)
IFRS 9 staging
Custom stress scenario
Define your own multipliers for committee review. Useful for portfolio-specific shocks.
Saved scenarios
Fill in your data to see the report
This simulator only generates a diagnosis, charts and recommendations when it has your real business values. Fill the editor above and the report will appear automatically.
Required data
Portfolio segments
Total exposure
Want to explore it first?
Load a realistic case to see how the report looks. You can edit any field afterwards.
Gordy, M.B. (2003) — A Risk-Factor Model Foundation for Ratings-Based Capital Rules.
How it works
1. Load your segments
Define each segment with # of accounts, average exposure, PD, LGD and APR. Start with defaults and customize.
2. Calibrate policy
Funding cost, operating cost, target RAROC and max tolerable EL. Your policy determines which segments destroy value.
3. Compare scenarios
Review base, conservative and aggressive. Spot segments to shrink or reprice, and generate an AI interpretation.
Frequently asked questions
1What is expected loss and how is it calculated?
Expected loss (EL) is the average annual loss you anticipate from defaults. It is EL = PD × LGD × EAD, where PD is probability of default, LGD is the fraction of the loan you lose under default, and EAD is your total exposure.
2What is RAROC and why does it matter?
RAROC is risk-adjusted return: how much each unit of exposure earns after expected losses, funding cost, and operating cost. If RAROC is below your cost of capital, the segment destroys value even if it shows accounting profit.
3Does this simulator replace an internal risk model?
No. It's an educational scenario tool — it assumes PD, LGD and exposure are correct. A real internal model covers vintages, bucket migration, concentrations and regulation. Use it to understand drivers and prioritize analysis, not as an official model.
4Why do the conservative and aggressive scenarios move PD and LGD?
Because they're the most cycle-sensitive variables. Under stress PD rises and recoveries fall (LGD rises). Our conservative scenario multiplies PD ×1.5 and LGD ×1.15, aligned with common simple stress-testing practices.
Related simulators
Connect credit risk to cash impact and overall financial profitability.
1How do you calculate the credit risk of a portfolio?
It is calculated as aggregate expected loss: EL = sum of (PD x LGD x EAD) across every borrower, plus an unexpected loss (UL) component that incorporates default correlation. PD comes from a behavioral or application scoring model; LGD is estimated with historical recoveries net of collection costs; EAD is the outstanding balance plus a CCF for revolving lines.
2What is probability of default (PD)?
It is the statistical probability that a borrower will default (90+ days past due per Basel) within a 12-month horizon. It is estimated with logistic models, decision trees, or gradient boosting fed by bureau variables, income, job stability, and payment behavior. In healthy LatAm consumer portfolios it ranges between 2% and 6%; in microfinance it can reach 8-12%.
3What is LGD and how is it calculated?
Loss Given Default is the percentage of exposed balance that is lost after enforcing collateral, judicial collection, and out-of-court collection. It is calculated as 1 - (net recoveries / EAD) on closed vintages of at least 24 months. Unsecured consumer credit runs 60-75%; mortgage with real-estate collateral drops to 20-35%; auto to 40-55%.
4What is the difference between credit risk and market risk?
Credit risk is the expected loss from counterparty default; market risk is the loss from price movements of assets (rates, FX, equity). A bank carries both: credit risk on its loan book, market risk on its treasury portfolio. Basel III capitalizes them separately with distinct methodologies (IRB for credit, VaR or FRTB for market).
5How do you run a stress test on a credit portfolio?
You define coherent adverse scenarios (recession, rate hike, sector drop), adjust PD, LGD, and EAD by segment based on scenario severity, recompute expected loss and required capital, and compare against provisions and available capital. The typical regulatory stress test uses 3 scenarios - base, adverse, and severely adverse - over a 3-year horizon.
6What is credit VaR?
It is the maximum loss of the credit portfolio that will not be exceeded at a given confidence level (typically 99% or 99.9%) over a 12-month horizon. Unlike expected loss (mean), VaR captures the tail - the stress scenarios. The gap between VaR and EL is unexpected loss, which Basel requires banks to cover with economic capital.
7What models exist for measuring credit risk?
The four standard frameworks are: CreditMetrics (JP Morgan, rating migrations and mark-to-market), KMV-Moody's (distance-to-default using equity price), CreditRisk+ (Credit Suisse, actuarial, default frequencies), and Credit Portfolio View (McKinsey, econometric with macro variables). For SMB and fintech, simplified variants combining logistic scoring with Monte Carlo over the EL equation are used.
8How do you diversify a credit portfolio by sector?
Apply maximum concentration limits by economic sector (typically 15-20%), geography (maximum 25-30%), borrower size (Herfindahl index below 0.10), and product. Effective diversification requires intra-sector default correlations to stay below 0.25; otherwise a sectoral shock triggers correlated default and diversification collapses.
9What credit risk indicators do banks use?
The core KPIs are: delinquency ratio (IMOR), non-performing loans over total loans, provision coverage (provisions / NPL), cost of risk (period provisions / average portfolio), recovery rate, annualized expected loss over portfolio, and RAROC by segment. Additionally, banks track rating migrations, roll rates between delinquency buckets, and NPL formation rate.
10How do you adjust origination policies for a recession?
Raise the score cut-off by 10-15%, trim maximum amounts in segments more correlated with the cycle (discretionary consumer, tourism, construction), shorten tenor to reduce average EAD, reinforce income verification, and lower LTV on collateralized products. The simulator lets you see the pro-forma impact on placement, expected loss, and RAROC before updating rules in the originator.
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What you'll see, what it prevents, and where you shouldn't trust it
Every simulator on Simúlalo ships with the same editorial structure: two hypothetical worked examples with numbers, the errors it helps you avoid, the model's declared limitations, and a visible financial disclaimer. The review is signed and dated.
Hypothetical case·Case A
A lender that pauses origination when segment RAROC is 220 bps below cost of capital
A non-bank financial institution with a $480M MXN portfolio has three segments: micro, SMB, and payroll. The micro segment is 18% of the portfolio with 9.5% PD, 65% LGD, 92% EAD weighting, and 38% gross yield. Under simplified Basel/IFRS-9, RAROC comes out at 12.8% — 220 bps below the internal cost of capital (15%). The stress test adds 30% to PD: RAROC falls to 7.4%. The decision: close new origination in micro for two quarters, clean up the portfolio, and reopen with a tightened scoring model.
Illustrative figures. Does not represent a real company or an investment recommendation.
Hypothetical case·Case B
A fintech that raises limits where pre-stress RAROC is 18.6%
A consumer credit fintech evaluates raising the average limit on the 'prime salaried' segment from $25,000 to $40,000 MXN per customer. That segment has 2.1% PD, 45% LGD, 88% EAD, and 31% yield. The simulator shows base RAROC of 18.6% — well above the 14% cost of capital. The stress (PD x 1.5) brings it to 14.9%, still profitable. The decision: raise limits in tranches and monitor monthly cohorts while keeping the rest of the portfolio intact.
Illustrative figures. Does not represent a real company or an investment recommendation.
Common mistakes it helps you avoid
Things a team or decision-maker might assume that this simulator forces you to verify before committing.
Confusing accounting provisions with economic expected loss: the first is mandated by IFRS-9, the second is PD × LGD × EAD and drives economic capital.
Applying the portfolio's average PD to an atypical segment: the simulator requires PD per segment so capital allocation reflects real risk.
Skipping stress testing: a portfolio can have healthy RAROC and break when PD doubles in a moderate recession.
Mixing pricing and risk underwriting: RAROC measures profitability, but the approve/reject decision also requires repayment capacity and exposure concentration.
Model limitations
What the simulator does not do, and where you need a professional or a specialized tool.
It is not a regulatory engine. It does not replace the official RWA calculation or the documentation required by your auditor or local regulator.
Migration matrices are assumed stable. In acute crises migrations accelerate and the model's assumptions stop holding.
Does not query bureaus in real time. PD and LGD are declared by the user or imported; the simulator does not pull from any bureau.
Economic capital is computed at standard confidence (99.9% by default). If your institution uses a different confidence, adjust before deciding.
When NOT to use this simulator
Do not use this simulator as a substitute for your IFRS-9 provisioning engine or the regulatory capital calculation reported by your risk unit. It is a scenario tool for accelerating the conversation between commercial, risk, and finance. Before presenting to a credit committee or to CNBV, Banxico, SBS, or your local financial authority, validate the numbers against your institution's official methodology.
Financial notice
Results are illustrative estimates and do not constitute financial, tax, accounting, or legal advice. Use the results as a reference point and validate important decisions with a certified professional.
Editorial review
Reviewed by the Simúlalo editorial team
This simulator was reviewed by the people listed below before being published. The review covers the declared formula, the model's assumptions, the explicit limitations, and the absence of unsupported financial claims.
They are part of the Simúlalo editorial team, focused on building financial tools that are clear, educational, and easy to interpret.
Last updated: ·We update this page when the methodology, sources used, or simulator structure change.
This tool uses standard financial formulas and user-supplied data. To explain concepts like rates, credit, risk, or cash flow we consult public and official sources (Banxico, SAT, CONDUSEF, CNBV, Banco de España, IFRS, BIS, among others). Simúlalo is not affiliated with, sponsored by, or endorsed by these institutions.