Improved Modeling of Double Default Effects in Basel II - An Endogenous Asset Drop Model without Additional Correlation
In 2005 the Internal Ratings Based (IRB) approach of `Basel II' was enhanced by a `treatment of double default effects' to account for credit risk mitigation techniques such as ordinary guarantees or credit derivatives. This paper reveals several severe problems of this approach and presents a new method to account for double default effects. This new it asset drop technique can be applied within any structural model of portfolio credit risk. When formulated within the IRB approach of Basel II, it is very well suited for practical application as it does not pose extensive data requirements and economic capital can still be computed
|Date of creation:||Oct 2009|
|Date of revision:|
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- Erik Heitfield & Norah Barger, 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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- Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
- Carey, Mark & Hrycay, Mark, 2001. "Parameterizing credit risk models with rating data," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 197-270, January.
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