The Basel Handbook
First published:
ISBN: 9781904339557
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Explaining the Credit Risk Elements in Basel II
Simon Hills and Ross Barrett
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
Modern banking is built on the sensible premise that holding a large portfolio of loans held together is less risky than one held on its own. While some borrowers may default, the loss of principal should be more than offset by the interest received from those that do not. Credit risk is the major risk to which banks are exposed – making loans or taking on credit exposure, perhaps by way of a derivative transaction, is the principal activity of most banks – and it has confounded bankers since the first loan was made.
Credit risk is the risk to a bank’s earnings or capital base arising from a borrower’s failure to meet the terms of any contractual or other agreement it has with the bank. It arises from all activities where success depends on counterparty, issuer or borrower performance.
Credit risk is present at any time a bank has funds extended to, invested in, or otherwise committed to a counterparty, whether reflected on or off the balance sheet. Credit risk arises because, in extending credit, banks have to make judgements about a borrower’s creditworthiness – its ability to pay principal and interest when due. This creditworthiness may decline over time due to poor
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