Technical paper/Basel II
A Merton approach to transfer risk
Transfer risk is the risk that debtors in a country are unable to ensure timely payments of foreign currency debt service due to transfer or exchange restrictions, or a general lack of foreign currency. Although this risk is not extensively addressed in…
Rating properties and their implications for Basel II capital
Robert Rauhmeier and Harald Scheule offer new insights on the verification of ratings. Within a consistent framework, the basic properties of association, calibration, discrimination and refinement in rating forecasts are defined and measures derived. It…
A forward-looking adjustment for op risk quantification
Anupam Sahay and Ashish Dev present a general discussion of the basic elements of a rational framework for operational risk quantification. Then they focus on modelling the effect of internal controls and business environment on operational events. The…
Rating properties and their implications for Basel II capital
Internal ratings
PD estimates for Basel II
One of the main issues banks will have to face to comply with the new Basel II internal ratings-based approach is to prove that the long-run average probabilities of default they assign to their clients, which will be used as the basis for regulatory…
Benchmarking asset correlations
Basel II stipulates that the asset correlation to be used in calibration of obligor risk weights is20%. Here, Alfred Hamerle, Thilo Liebig and Daniel Rösch use a parametric model to empirically obtain asset correlations from a large database of…
Benchmarking asset correlations
Basel II stipulates that the asset correlation to be used in calibration of obligor risk weights is 20%. Here, Alfred Hamerle, Thilo Liebig and Daniel Rösch use a parametric model to empirically obtain asset correlations from a large database of…
Probing granularity
Basel II
Random tranches
How should economic or regulatory capital be allocated to tranches of securitisations? The standard Basel conditional dependence calculations are complicated in this case by non-linearity effects and complex deal dependence. Here, Michael Gordy and David…
Advancing op risk management using Japanese banking experience
Junji Hiwatashi and Hiroshi Ashida of the Bank of Japan outline a practical framework for operational risk management, derived from research and experiences in Japan's financial community.
Random tranches
How should economic or regulatory capital be allocated to tranches of securitisations? The standard Basel conditional dependence calculations are complicated in this case by non-linearity effects and complex deal dependence. Here, Michael Gordy and David…
Risk management based on stochastic volatility
Risk management approaches that do not incorporate randomly changing volatility tend to under- or overestimate the risk, depending on current market conditions. We show how some popular stochastic volatility models in combination with the hyperbolic…
How to avoid overestimating capital charges for op risk
Pooling internal and external data is a central issue to estimating capital charges for operational risk. Here, Nicolas Baud, Antoine Frachot and Thierry Roncalli of Crédit Lyonnais discuss the methodology they have developed.
Testing rating accuracy
As Basel II approaches the implementation stage, regulators have identified internal ratings validation as a key challenge for banks using this approach. Here, Bernd Engelmann, Evelyn Hayden and Dirk Tasche build upon previous research showing how to use…
Op risk modelling for extremes
Part 2: Statistical methods In this second of two articles, Rodney Coleman, of Imperial College London, continues his demonstration of the uncertainty in measuring operational risk from small samples of loss data.
Unsystematic credit risk
Although Basel has shifted its treatment of unsystematic credit risk from the first, capital rules pillar (where it was called the ‘granularity adjustment’) to the second, supervisory pillar of the forthcoming Accord, this issue is of great practical…
Portfolio allocation to corporate bonds with correlated defaults
This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility ofcorrelated defaults. Under fairly general assumptions for the distribution of thetotal net assets of a set…
Fallacies about the effects of market risk management systems
This paper takes another look at allegations that risk management systems have contributed to increased volatility in financial markets, with the particular example of the summer of 1998. The paper also provides new evidence on the potential effect of…
Avoiding pro-cyclicality
David Cosandey and Urs Wolf argue that, for small to medium-sized enterprises, Basel II is pro-cyclical because of a double-counting of the risks. They present two main directions for possible capital rules that would circumvent the pro-cyclicality…
Credit risk measurement of securitisation structures
Peter-Paul Hoogbruin, Harmenjan Sijtsma and Viktor Tchistiakov of ING Group Credit Risk Management present a framework for valuing securitisation tranches from an investor’s perspective.
Using Bayesian networks to predict op risk
By combining qualitative and quantitative data, Bayesian networks offer the perfect solution to the compelling need for an integrated approach to operational risk management, say Martin Neil and Ed Tranham.
The maturity effect on credit risk capital
In a mark-to-market approach to credit risk capital, ratings or spread volatility has the effect of making longer-maturity loans more capital-intensive. This is incorporated in the current Basel II proposals via a maturity adjustment factor. Arguing that…
Credit risk in asset securitisations: an analytical model
How much capital should banks reserve against investments in portfolio securitisations? Asserting that recent proposals on this subject by Basel are inconsistent, Michael Pykhtin and Ashish Dev propose a new analytical model suitable for tranches of…