  If the probability of default parameters (PDs) fed as input into a credit
portfolio model are estimated as through-the-cycle (TTC) PDs stressed market
conditions have little impact on the results of the capital calculations
conducted with the model. At first glance, this is totally different if the PDs
are estimated as point-in-time (PIT) PDs. However, it can be argued that the
reflection of stressed market conditions in input PDs should correspond to the
use of reduced correlation parameters or even the removal of correlations in
the model. Additionally, the confidence levels applied for the capital
calculations might be made reflective of the changing market conditions. We
investigate the interplay of PIT PDs, correlations, and confidence levels in a
credit portfolio model in more detail and analyse possible designs of
capital-levelling policies. Our findings may of interest to banks that want to
combine their approaches to capital measurement and allocation with active
portfolio management that, by its nature, needs to be reflective of current
market conditions.
