Probing granularity

The granularity adjustment, which adjusts risk weightings for credit portfolio diversification, is one of Basel II’s key modelling assumptions. Here, Tom Wilde uncovers a weakness in this assumption arising from the differences in the underlying credit portfolio models incorporated within the internal ratings-based approach.

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Online References:
Basel Committee on Banking Supervision, 2001. The new Basel capital accord. IRB Consultative Document, Bank for International Settlements, January.

Gordy M, 2001. A risk factor model foundation for ratings based capital rules. Working paper, February.

Wilde T, 2001. IRB approach explained. Risk May, pages 87–90.

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

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