Probing granularity
The granularity adjustment, which adjusts risk weightings for credit portfolio diversification, is one of Basel II’s key modelling assumptions. Here, Tom Wilde uncovers a weakness in this assumption arising from the differences in the underlying credit portfolio models incorporated within the internal ratings-based approach.
Online References:
Basel Committee on Banking Supervision, 2001. The new Basel capital accord. IRB Consultative Document, Bank for International Settlements, January.
Gordy M, 2001. A risk factor model foundation for ratings based capital rules. Working paper, February.
Wilde T, 2001. IRB approach explained. Risk May, pages 87–90.
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