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

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Listed:
  • Sebastian Ebert
  • Eva Lütkebohmert

Abstract

ABSTRACT Within the internal ratings-based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversified away. The impact of undiversified idiosyncratic risk on portfolio value-at-risk can be quantified using a granularity adjustment (GA). We provide an analytic formula for the GA in an extended single-factor CreditRiskC setting, incorporating double default effects. The formula accounts for guarantees and the reduction of credit risk in portfolios that is brought about by guarantees. Our general GA is very well suited 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.

Suggested Citation

  • Sebastian Ebert & Eva Lütkebohmert, . "Treatment of double default effects within the granularity adjustment for Basel II," Journal of Credit Risk, Journal of Credit Risk.
    • Handle: RePEc:rsk:journ1:2160714
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    References listed on IDEAS

    as
    1. Peter Grundke, 2008. "Regulatory treatment of the double default effect under the New Basel Accord: how conservative is it?," Review of Managerial Science, Springer, vol. 2(1), pages 37-59, March.
    2. Susanne Emmer & Dirk Tasche, . "Calculating credit risk capital charges with the one-factor model," Journal of Risk, Journal of Risk.
    3. Lütkebohmert, Eva & Gordy, Michael B., 2007. "Granularity adjustment for Basel II," Discussion Paper Series 2: Banking and Financial Studies 2007,01, Deutsche Bundesbank.
    4. Norah Barger & Erik Heitfield, 2003. "Treatment of double-default and double-recovery effects for hedged exposures under pillar I of the proposed New Basel Capital Accord," Basel II White Paper 2, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Eva Lütkebohmert, . "Failure of the saddlepoint method in the presence of double defaults," Journal of Risk, Journal of Risk.
    2. Ebert, Sebastian & Lütkebohmert, Eva, 2009. "Improved Modeling of Double Default Effects in Basel II - An Endogenous Asset Drop Model without Additional Correlation," Bonn Econ Discussion Papers 24/2009, University of Bonn, Bonn Graduate School of Economics (BGSE).

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    More about this item

    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

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