The Basel Handbook
First published:
ISBN: 9781904339557
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Development and Validation of Key Estimates for Capital Models
Michel Araten
Development and Validation of Key Estimates for Capital Models
Explaining the Correlation in Basel II: Derivation and Evaluation
Explaining the Credit Risk Elements in Basel II
Loss Given Default and Recovery Risk: From Basel II Standards to Effective Risk Management Tools
Assessing the Validity of Basel II Models in Measuring Risk of Credit Portfolios
Measuring Counterparty Credit Risk for Trading Products under Basel II
Implementation of an IRB-Compliant Rating System
Stress Tests of Banks’ Regulatory Capital Adequacy: Application to Tier 1 Capital and to Pillar 2 Stress Tests
Advanced Credit Model Performance Testing to Meet Basel Requirements: How Things Have Changed!
Designing and Implementing a Basel II Compliant PIT–TTC Ratings Framework
Basel II in the Light of Moody’s KMV Evidence
Basel II Capital Adequacy Rules for Retail Exposures
IRB-Compliant Models in Retail Banking
Basel II Capital Adequacy Rules for Securitisations
Regulatory Priorities and Expectations in the Implementation of the IRB Approach
Market Discipline and Appropriate Disclosure in Basel II
Validation of Banks’ Internal Rating Systems – A Supervisory Perspective
Rebalancing the Three Pillars of Basel II
Implementing a Basel II Scenario-Based AMA for Operational Risk
Loss Distribution Approach in Practice
An Operational Risk Rating Model Approach to Better Measurement and Management of Operational Risk
Constructing an Operational Event Database
Insurance and Operational Risk
INTRODUCTION
Economic capital models, as well as, Basel II regulatory capital models under the advanced internal ratings-based (AIRB) approach require, at minimum, estimates of three key parameters. The qualification criteria for using the AIRB approach includes demonstrating to the relevant supervisors that these estimates are an appropriate quantification of the risk-rating process that can be validated and that are subject to the control and oversight of independent parties. This chapter deals with methods for estimating the values of these parameters from historical data and with approaches for validation of these estimates for Basel II. The three key parameters are as follows:
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(1) |
PD: PD, also known as expected default frequency, is the default probability for a borrower over a one year period. It is often associated or mapped to the risk grade or risk rating (RR) of the borrower. |
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(2) |
LGD: LGD, also known as loss severity, is the expected amount of loss on a facility provided to the borrower. Loss given default and recovery (given default) are the mirror images of each other, as they add up to the amount owed by the |
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