Expected problems

marcelo-cruz-morgan-stanley-2010

There is a significant difference in regulatory treatment of expected losses between credit and operational risk. As a general rule, risk capital is supposed to cover for unexpected losses only, as expected losses are usually provisioned or budgeted for. The Basel II rules (International convergence of capital measurement and capital standards: A revised framework, June 2004) contain an entire section on credit risk (section III.G) that discusses the treatment of expected losses and recognition

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