Basel-2 capital adequacy: Computing the dfairT capital charge for loan commitment dtrueT credit risk
نویسندگان
چکیده
This research makes two contributions: (i) to price analytically put option and extension premium embedded in a borrower-extendible commitment, and (ii) to compute the dfairT capital charge that corresponds to the commitment dtrueT credit risk. In doing so, the procedure replaces the BIS accountingbased concepts of credit-conversion factor, principal-risk factor, and initial term to maturity of irrevocable commitments with the market-based concepts of exercise-cum-takedown proportion and put value implicit in the borrower-extendible commitment, respectively. Finally, the approach is developed one step further to account for the borrowers’ risk ratings by public credit agencies; this results in a two-dimensional (timestate of nature) risk-weighting system that applies to all commitment types. D 2005 Elsevier Inc. All rights reserved. JEL classification: G13; G21
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