Treatment of double default effects within the granularity adjustment for Basel II

S. Ebert, E. Lütkebohmert

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversi?ed away. The impact of undiversi?ed idiosyncratic risk on portfolio Value-at-Risk can be quanti?ed via a granularity adjustment (GA). We provide an analytic formula for the GA in an extended single- factor CreditRisk+ setting incorporating double default e?ects. It accounts for guarantees and their e?ect of reducing credit risk in the portfolio. Our general GA very well suits for application under Pillar 2 of Basel II as the data inputs are drawn from quantities already required for the calculation of IRB capital charges.
Original languageEnglish
Pages (from-to)3-33
JournalJournal of Credit Risk
Volume7
Issue number1
Publication statusPublished - 2011
Externally publishedYes

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Basel II
Idiosyncratic risk
Internal ratings
Value at risk
Factors
Charge
Guarantee
Credit risk

Cite this

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abstract = "Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversi?ed away. The impact of undiversi?ed idiosyncratic risk on portfolio Value-at-Risk can be quanti?ed via a granularity adjustment (GA). We provide an analytic formula for the GA in an extended single- factor CreditRisk+ setting incorporating double default e?ects. It accounts for guarantees and their e?ect of reducing credit risk in the portfolio. Our general GA very well suits for application under Pillar 2 of Basel II as the data inputs are drawn from quantities already required for the calculation of IRB capital charges.",
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Treatment of double default effects within the granularity adjustment for Basel II. / Ebert, S.; Lütkebohmert, E.

In: Journal of Credit Risk, Vol. 7, No. 1, 2011, p. 3-33.

Research output: Contribution to journalArticleScientificpeer-review

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AU - Lütkebohmert, E.

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AB - Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversi?ed away. The impact of undiversi?ed idiosyncratic risk on portfolio Value-at-Risk can be quanti?ed via a granularity adjustment (GA). We provide an analytic formula for the GA in an extended single- factor CreditRisk+ setting incorporating double default e?ects. It accounts for guarantees and their e?ect of reducing credit risk in the portfolio. Our general GA very well suits for application under Pillar 2 of Basel II as the data inputs are drawn from quantities already required for the calculation of IRB capital charges.

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