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

Failure of Saddle-point Method in the Presence of Double Defaults

We show that the saddle-point approximation method to quantify the impact of undiversified idiosyncratic risk in a credit portfolio is inappropriate in the presence of double default effects. Specifically, we prove that there does not exist an equivalent formula to the granularity adjustment, that accounts for guarantees, in case of the extended single-factor CreditRisk model. Moreover, in case...

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 asset drop technique can be applied within ...

Granularity adjustment for Basel II

The credit value-at-risk model underpinning the Basel II Internal Ratings-Based approach assumes that idiosyncratic risk has been diversified away fully in the portfolio, so that economic capital depends only on systematic risk contributions. We develop a simple methodology for approximating the effect of undiversified idiosyncratic risk on VaR. The supervisory review process (Pillar 2) of the ...

Treatment of Double-Default and Double-Recovery Effects for Hedged Exposures under Pillar I of the Proposed New Basel Capital Accord

How can the change of Basel Capital Requirements affect the Monetary Policy Impact on the Iranian Economy and Banking System?

In this study, we examined the effects of monetary policy shocks on the performance of the Iranian macroeconomy and the banking system, under the different situations of the Basel II and III capital requirements regulations. By developing a DSGE Model and according to its structural shocks, four observable variables including output gap, bank capital adequacy, inflation, and money base growth r...