Treatment of Double Default Effects within the Granularity Adjustment for Basel II
AbstractWithin 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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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse10_2009.
Date of creation: Jul 2009
Date of revision:
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analytic approximation; Basel II; counterparty risk; double default; granularity adjustment; IRB approach; securitization;
Find related papers by JEL classification:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-16 (All new papers)
- NEP-BAN-2009-08-16 (Banking)
- NEP-BEC-2009-08-16 (Business Economics)
- NEP-REG-2009-08-16 (Regulation)
- NEP-RMG-2009-08-16 (Risk Management)
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