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Emerging Market Default Risk Charge Model

Author

Listed:
  • Angelo D. Joseph

    (School of Business Leadership, University of South Africa, Midrand, Johannesburg 2006, South Africa)

Abstract

In a default event, several obligors simultaneously experience financial difficulty in servicing their debt to the point where the entire market can experience a sudden yet significant jump to a credit default. To help protect lenders against a jump-to-default event, regulators require banks to hold capital equivalent to the default risk charge as a buffer against the losses they may incur. The Basel regulatory committee has articulated and set default risk modelling guidelines to improve comparability amongst banks and enable a consistent bank-wide default risk charge estimation. Emerging markets are unique because they usually have illiquid markets and sparse data. Thus, implementing an emerging market default risk model and, at the same time, complying with the regulatory guidelines can be non-trivial. This research presents a framework for modelling the default risk charge in emerging markets in line with the regulatory requirements. The default correlation model inputs are derived and empirically calibrated using emerging market data. The paper ends with some considerations that regulators, supervisors, and banks can use to get financial institutions to adopt an emerging markets default risk charge model.

Suggested Citation

  • Angelo D. Joseph, 2023. "Emerging Market Default Risk Charge Model," JRFM, MDPI, vol. 16(3), pages 1-18, March.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:3:p:194-:d:1095745
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    References listed on IDEAS

    as
    1. Jean-Paul Laurent & Michael Sestier & Stéphane Thomas, 2016. "Trading book and credit risk: How fundamental is the Basel review?," Post-Print hal-03676300, HAL.
    2. Luis E. Pereiro, 2010. "The Beta Dilemma in Emerging Markets," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(4), pages 110-122, September.
    3. Laurent, Jean-Paul & Sestier, Michael & Thomas, Stéphane, 2016. "Trading book and credit risk: How fundamental is the Basel review?," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 211-223.
    Full references (including those not matched with items on IDEAS)

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