The Basel Handbook
First published:
ISBN: 9781904339557
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Implementation of an IRB-Compliant Rating System
Sebastian Fritz, Michael Luxenburger and Thomas Miehe
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
Numerous publications exist regarding Basel II and the related issue on credit rating, but they concentrate on very specific topics. Our objective in this chapter is to compile all aspects that are relevant to the implementation of a rating system, which is compliant with Basel II. We start with general considerations on the assessment horizon, data quality and default definition, describe several measures for the separation power, and the assignment of probabilities of default (PD).11The separation power (also called discriminative power) describes how well a rating model discriminates between defaulting and non-defaulting customers.
We then elaborate how to derive rating methodologies based on econometric approaches, expert systems and hybrid systems. Using these techniques, we then explain how to derive ratings for retail, corporate, bank, (sub-) sovereign exposure and specialised lending.22The asset-class sub-sovereign includes federal states, regions and municipalities.
A separate section describes the additional risk components such as exposure at default (EAD) and loss given default (LGD) and how to come up with a calibration and validation for the advanced
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