The Basel Handbook
First published:
ISBN: 9781904339557
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Loss Given Default and Recovery Risk: From Basel II Standards to Effective Risk Management Tools
Andrea Resti and Andrea Sironi
Loss Given Default and Recovery Risk: From Basel II Standards to Effective Risk Management Tools
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
One of the main objectives pursued by the new Basel Accord on regulatory capital (reforming the capital-adequacy framework originally developed in 1988) is to narrow the gap between regulatory capital requirement and the economic capital produced by banks’ own internal models (see Basel Committee on Banking Supervision 2004). This gap is indeed perceived to be the main reason behind regulatory capital arbitrage transactions. Following this objective, the Committee introduced the internal ratings-based (IRB) approach as a way of estimating a bank’s credit risk capital requirement. According to this approach, four main variables affect the credit risk of a financial asset. They are: (i) the probability of default of the borrower (PD); (ii) its “loss given default”, ie, the percentage of a loan that is actually lost, after accounting for all recoveries on the defaulted exposure (LGD); (iii) the exposure at default (EAD); and (iv) its maturity (M). Moreover, although not explicitly mentioned, LGD affects also the standardised approach. In fact, some facilities and collaterals are granted a reduction in the capital requirements because they are thought to imply higher
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