Banks face the challenge of forecasting losses and loss distributions in relation to their credit risk exposures. Most banks choose a modular approach in line with the current proposals of the Basel Committee on Banking Supervision (2004), where selected risk parameters such as default probabilities, exposures at default and recoveries given default are modelled independently. However, the assumption of independence is questionable. Previous studies have shown that default probabilities and recovery rates given default are negatively correlated [Carey (1998), Hu and Perraudin (2002), Frye (2003), Altman et al. (2005), or Cantor and Varma (2005)]. A failure to take these dependencies into account will lead to incorrect forecasts of the loss distribution and the derived capital allocation.