Default frequency and loss severity: an update to Credora vault ratings

A market holding 5% of a vault, losing 40% of its value in default, writes down 2% of the vault. A market holding 40% of a vault, losing 2% of its value in default, writes down 0.8%. The smaller position carries the larger loss.

Credora’s vault rating methodology now measures vault risk on that basis. The updated logic is live in the vaults and pools methodology documentation.

Key takeaways

• A vault is now rated on the single market most able to breach its loss threshold on its own, measured by both how likely that market is to default and how severe the loss would be.
• The calculation combines each market’s probability of default, its loss given default, and its allocation. All of it sits on top of the full market and asset analysis behind every rating.
• Position size and loss severity are separate risks. A small allocation to a high-severity market can set the rating for an entire vault.
• Most vault ratings are unchanged. A portion move lower, the majority by a single grade. The markets did not change. The way their severity enters the vault figure did.

What the vault rating measures

A vault is a portfolio of lending markets. Each market carries its own Probability of Significant Loss (PSL): how likely the market is to default, and how much of a position is lost when it does.

The vault-level question is narrower. What is the probability that one market defaults with a loss severe enough to push the entire vault past its loss threshold?

The aggregation draws on the full market and asset analysis behind each rating, and combines three of its outputs at the vault level. The probability of default (PD), or how likely the market is to default over the rating horizon. The loss given default (LGD), meaning the share of the position written off in that scenario, modelled as a distribution rather than a single point. And the allocation, the share of vault capital deployed into the market.

Allocation multiplied by LGD gives the loss the vault absorbs if that market defaults. Where that loss clears the vault’s threshold, the market’s PD passes through to the vault. Where it stays below, the market cannot independently breach the vault, and its weight in the calculation falls away.

Each market therefore has its own probability of causing a vault-level breach. Those probabilities combine into a single figure: the likelihood that at least one market breaches the threshold. That figure is the Anchor Vault PSL.

The modifiers are unchanged

Two adjustments refine the Anchor Vault PSL into the final rating, and neither of them moved in this update.

The curator modifier scores the vault manager on track record, assets under management, and number of active pools, then applies a notch adjustment of +0.25, 0, or -0.25 depending on tier.

The governance modifier averages two components: guardian structure (no guardian, multi-sig, or DAO) and timelock duration. Where the combined governance adjustment is negative, the penalty is halved for Tier 1 curators.

A worked example

Consider a vault with the following allocation, drawn from the rated universe:

• 79% of capital in a market rated A, with a market PSL of 0.30% and modelled LGD peaking near 2%
• 14% of capital in a market rated B, with a market PSL of 1.80% and modelled LGD reaching 30%
• The remainder spread across smaller A-rated positions

Weighted by allocation, the B-rated market contributes roughly a quarter of a percentage point to the vault figure. The A-rated markets dominate the arithmetic because they hold most of the capital.

Measured by breach probability, the same B-rated market is the binding constraint. A 14% allocation losing 30% of its value writes down 4.2% of vault net asset value, well past the vault’s loss threshold on its own. Its 1.80% default probability therefore reaches the vault almost undiluted, while the A-rated markets, which cannot breach the threshold at their modelled severity, contribute close to nothing.

This vault moved two grades under the updated logic. Its capital sits in A-rated markets. Its risk sits in the one position that can independently write down the vault.

What changed in the ratings

The updated aggregation was applied across the rated vault universe on Morpho V1 and Morpho V2.

Most vault ratings are unchanged. A portion move lower, the majority by a single grade and a small number by two, where one high-severity position sets the vault rating on its own. The A band contracts and the A- band expands to absorb the shift.

These vaults hold the same markets they held before. The severity of those markets now enters the vault figure directly. A lower grade comes from a sharper measurement of an unchanged portfolio.

What this means for depositors and curators

A vault rating is a statement about the probability of losing principal, expressed on a scale that is comparable across vaults, curators, and protocols. When that statement becomes more precise, some vaults move.

For a depositor, the practical consequence is that position size and loss severity are separate questions. A small position in a market with severe loss characteristics can set the rating for the whole vault. A large position in a market with contained loss characteristics may not.

For a curator, the same logic runs in reverse. Reducing an allocation to a high-severity market lowers the vault’s breach probability faster than reducing an allocation to a low-severity one of equivalent size. The rating responds to where severity sits as much as to where capital sits.

Reading the methodology

The full vault methodology, including the curator and governance modifiers, is published at credora.network/docs/methodologies/vaults-pools. Current ratings across the rated universe are available in the Credora app.

Frequently asked questions

What changed in Credora’s vault rating methodology?

The aggregation step that turns individual market risk into a vault rating. A vault rating now reflects the probability that a single market defaults with a loss severe enough to push the whole vault past its loss threshold. That probability combines each market’s default probability, its loss given default, and its allocation.

Why did some vault ratings move lower?

Because loss severity now enters the vault figure directly. A market with a high loss given default contributes more to vault risk than its allocation alone would suggest. Vaults holding one or more high-severity markets show a higher probability of a vault-level breach, which maps to a lower grade.

Does a lower rating mean the vault became riskier?

No. The markets inside these vaults did not change. The rating measures their combined risk more precisely than before. A lower grade reflects a sharper reading of the same portfolio.

Did the curator and governance modifiers change?

No. The curator modifier (track record, assets under management, and active pools) and the governance modifier (guardian structure and timelock duration) are unchanged. Only the aggregation of market risk into the Anchor Vault PSL was updated.

Where can I see the methodology and the current ratings?

The full methodology is at credora.network/docs/methodologies/vaults-pools. Live ratings across the rated universe are in the Credora app.

Ratings and data provided are for informational purposes only. Not investment advice or a solicitation to buy or sell assets. Always conduct your own due diligence. Credora does not guarantee the completeness or real-time accuracy of any information provided. A full disclaimer is included in each risk assessment report published at https://www.credora.network/reports/.