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Treatment of Double Default Effects within the Granularity Adjustment for Basel II

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Author Info

  • Sebastian Ebert

    ()

  • Eva Lütkebohmert

    ()

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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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse10_2009.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse10_2009.

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Length: 29
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:bon:bonedp:bgse10_2009

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: analytic approximation; Basel II; counterparty risk; double default; granularity adjustment; IRB approach; securitization;

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