Credit Risk Management Approaches Evaluation

In the context of credit risk management, financial institutions often utilize various models to assess the probability of default (PD) of counterparties. Consider a scenario where you are evaluating two companies, Company A and Company B. Company A has a PD of 2% based on historical default rates, while Company B shows a PD of 5% based on a predictive model that incorporates macroeconomic factors. While Company A is in an industry that has experienced stable growth, Company B operates within a sector that is currently facing significant downturns.

Based on these characteristics, which credit risk management approach is most appropriate for a financial institution looking to manage its exposure to both companies?