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Marking-to-model credit and operational risks of loan commitments: A Basel-2 advanced internal ratings-based approach

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  • Chateau, John-Peter D.

Abstract

Within a marking-to-model framework, this research computes the bank's capital charge for credit and operational risks of loan commitments at Basel-2 fixed audit date. This is done in three steps. The first one prices commitment credit risk as a Gram-Charlier put value and determines the commitment forward-funding proportion. In the second one, put value and funding proportion are combined to compute Basel-2 'fair' capital charge for credit and operational risks. By producing a moderate total capital charge, marking-to-model offers substantial capital relief with respect to the corresponding charge computed with Basel-2 simplified approach. Both charges are however larger than the corresponding nil charge arrived at in Basel-1. In the third step, marking-to-model reveals its flexibility by showing how banks can determine the cost of their exposure to borrowers' credit-rating downgrades and how they can also hedge any exposure to commitment default risk.

Suggested Citation

  • Chateau, John-Peter D., 2009. "Marking-to-model credit and operational risks of loan commitments: A Basel-2 advanced internal ratings-based approach," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 260-270, December.
  • Handle: RePEc:eee:finana:v:18:y:2009:i:5:p:260-270
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    1. repec:kap:rqfnac:v:50:y:2018:i:3:d:10.1007_s11156-017-0642-0 is not listed on IDEAS
    2. Chateau, Jean-Pierre D., 2011. "Contribution à la réglementation de Bâle-3 : de la consistance interne du continuum du crédit commercial en marquant à la « valeur de modèle » le risque de crédit des engagements de crédit," L'Actualité Economique, Société Canadienne de Science Economique, vol. 87(4), pages 445-479, décembre.

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