Regulatory capital modeling for credit risk

DOI10.1142/S021902491550034XzbMATH Open1337.91125arXiv1412.1183OpenAlexW3103834646MaRDI QIDQ2947348FDOQ2947348

Authors: Marek Rutkowski, Silvio Tarca 

Publication date: 22 September 2015

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk plays an important role in protecting the Australian banking sector against insolvency. We outline the mathematical foundations of regulatory capital for credit risk, and extend the model specification of the IRB approach to a more general setting than the usual Gaussian case. It rests on the proposition that quantiles of the distribution of conditional expectation of portfolio percentage loss may be substituted for quantiles of the portfolio loss distribution. We present a more economical proof of this proposition under weaker assumptions. Then, constructing a portfolio that is representative of credit exposures of the Australian banking sector, we measure the rate of convergence, in terms of number of obligors, of empirical loss distributions to the asymptotic (infinitely fine-grained) portfolio loss distribution. Moreover, we evaluate the sensitivity of credit risk capital to dependence structure as modelled by asset correlations and elliptical copulas. Access to internal bank data collected by the prudential regulator distinguishes our research from other empirical studies on the IRB approach.

Full work available at URL: https://arxiv.org/abs/1412.1183

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zbMATH Keywords

credit riskone-factor Gaussian copularegulatory capitalasymptotic single risk factor (ASRF) modelcredit value-at-risk (VaR)internal ratings-based (IRB) approachStudent's \(t\) copula

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Statistical methods; risk measures (91G70) Credit risk (91G40)

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Cited In (23)

• Quantifying the impact of different copulas in a generalized CreditRisk\(^+\) framework. An empirical study
• Credit risk and solvency capital requirements
• Empirical analysis of the average asset correlation for real estate investment trusts
• Quantifying credit portfolio losses under multi-factor models
• State dependent correlations in the Vasicek default model
• Sector concentration risk: a model for estimating capital requirements
• Metamodel of a large credit risk portfolio in the Gaussian copula model
• Modeling lifetime expected credit losses on bank loans
• Optimizing credit risk mitigation effects of collaterals under Basel II
• Credit Default Swaps and Bank Regulatory Capital*
• A lattice-theoretic model for predicting probabilities of credit losses.
• Credit risk measures and the estimation error in the ASRF model under the Basel II IRB approach
• RISK MEASURES DERIVED FROM A REGULATOR’S PERSPECTIVE ON THE REGULATORY CAPITAL REQUIREMENTS FOR INSURERS
• Solvency
• Efficient algorithms for calculating risk measures and risk contributions in copula credit risk models
• Robust and consistent estimation of generators in credit risk
• A Value-At-Risk Calculation of Required Reserves for Credit Risk in Corporate Lending Portfolios
• The default risk charge approach to regulatory risk measurement processes
• Title not available (Why is that?)
• Optimization heuristics for determining internal rating grading scales
• Financial stability and Basel II
• Model-free computation of risk contributions in credit portfolios
• Credit risk migration rates modeling as open systems: a micro-simulation approach

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