Technical paper/Risk management/Risk management
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…
Reconciling ratings
How should internal credit ratings be calibrated to long-term default rates? This multibillion-dollar question is at the heart of the debate over Basel’s IRB approach. In thisarticle, Stefan Blochwitz and Stefan Hohl use simulations to demonstrate wide…
Weighting for Risk
Basel has recognised that collateral and seniority give banks an advantage when an obligor defaults. Here, Jon Frye argues that the proposal may encourage banks to lend on the collateral – a practice that could threaten their own survival – and proposes…
Regulatory capital volatility
When the consultation period ends, what calibration of risk weights will Basel finally decide on? Here, Esa Jokivuolle and Samu Peura demonstrate that the ratings sensitivity of risk weights may require Basel to think more carefully about the…
IRB approach explained
At the end of this month, the consultation period for the new Basel Accord on bank capital will end. We have prepared a technical section this month devoted to various issues surrounding Basel II. In the first paper, Tom Wilde sheds light on the…
Stress tests and risk capital
For many financial institutions, "stress tests" are an important input into processes that set risk capital allocations. In the current regulatory environment, two distinct model-based approaches for setting regulatory capital requirements include stress…
A coherent framework for stress testing
In recent months and years, practitioners and regulators have embraced the idea of supplementing value-at-risk estimates with "stress testing". Risk managers are beginning to place an emphasis and expend resources on developing more and better stress…