From Basel II to Basel III

Financial institutions face major challenges in modelling credit portfolio risk, particularly in the field of CDOs. Walter Schulte-Herbrüggen and Gernot Becker argue that the main challenge will be in model testing, due to the increasingly customised risk profiles attainable from these instruments

In June 2004, the revised framework, International Convergence of Capital Measurement and Capital Standards (Basel II), was ratified. In contrast to demand from the industry, a bank’s use of credit portfolio models was not admitted under Pillar 1. Nevertheless, under the internal capital adequacy assessment process of Pillar 2, portfolio models are permitted and implicitly required for sophisticated banks.1

While many participants in the banking industry were disappointed with this result, the

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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