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

Author

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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    Cited by:

    1. is not listed on IDEAS
    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).
    3. Eva Lütkebohmert, . "Failure of the saddlepoint method in the presence of double defaults," Journal of Risk, Journal of Risk.

    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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