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An attempt to derive the Risk Weight Function for the bank

Nguyen, Van Phuong (2019): An attempt to derive the Risk Weight Function for the bank.

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Abstract

According to the Basel Accord II, one of the key factors in the Internal-Ratings Based (IRB) framework is the Risk Weight Function (RWF). Indeed, it uses four risk components including PD, LGD, EAD, and M as input to yield the capital requirement and thereby Risk-Weighted Asset (RWA). Given the extremely important role of the Risk Weight Function, in this project, we aim to derive it mathematically.

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