Munich Personal RePEc Archive

Regulatory capital determination and Its implications for internal ratings-based credit risk model development and validation

Cao, Honggao (2012): Regulatory capital determination and Its implications for internal ratings-based credit risk model development and validation.

[img]
Preview
PDF
MPRA_paper_46729.pdf

Download (263kB) | Preview

Abstract

Focusing on the interconnections between the Basel regulatory capital formula and several well-specified statistical models, this working paper seeks to understand some of the important issues embedded in the Basel Accord. These include: Where does this formula come from? What risks does it try to capture? Why does the Basel Accord stipulate that the formula be implemented on a basis of homogeneous segments for retail exposures or similar risk ratings of wholesale obligors? Is there any desirable property on the number of loans for a segment (or obligor group)? Why is LGD treated as a constant as opposed to a random variable? When covering expected loss – and determined independently – how is the loss reserve related to the minimum regulatory capital? Answers to these questions have some important implications for Basel model development and validation.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.