What risk does the Credit VaR (CVAR) model primarily focus on?

The Credit VaR (CVAR) model primarily focuses on credit risk, which pertains to the risk of loss due to a borrower's failure to make required payments. This model quantifies the potential loss in value of credit exposures over a specified time horizon under normal market conditions, within a certain confidence interval. By estimating the maximum expected loss in the value of a portfolio of credit instruments, CVAR provides critical insights needed for firms to manage and mitigate the credit risk associated with their portfolios effectively.

Credit risk includes considerations of counterparty default probabilities, recovery rates in the event of default, and exposure at default. This makes the CVAR particularly suited to addressing risks directly related to borrowers' creditworthiness rather than risks associated with liquidity, market conditions, or operational failures. Understanding this distinction is crucial for risk managers in implementing relevant strategies and measures to safeguard against potential losses from credit defaults.