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 capital requirements, are correct. Currently, there are no standard tests to compare them with observed default rates. Laurent Balthazar develops an approach that is directly derived from the Basel II theoretical framework and proposes tests that could be a basis of discussion between banks and regulators
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