Please use this identifier to cite or link to this item: http://hdl.handle.net/2440/108667
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Type: Journal article
Title: Regulatory capital modeling for credit risk
Author: RUTKOWSKI, M.
TARCA, S.
Citation: International Journal of Theoretical and Applied Finance, 2015; 18(5):1550034
Publisher: World Scientific Publishing Company
Issue Date: 2015
ISSN: 0219-0249
1793-6322
Statement of
Responsibility: 
Marek Rutkowski and Silvio Tarca
Abstract: The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk plays an important role in protecting the banking sector against insolvency. We outline the mathematical foundations of regulatory capital for credit risk, and extend the model specification of the IRB approach to a more general setting than the usual Gaussian case. It rests on the proposition that quantiles of the distribution of conditional expectation of portfolio percentage loss may be substituted for quantiles of the portfolio loss distribution. We present a more compact proof of this proposition under weaker assumptions. Then, constructing a portfolio that is representative of credit exposures of the Australian banking sector, we measure the rate of convergence, in terms of number of obligors, of empirical loss distributions to the asymptotic (infinitely fine-grained) portfolio loss distribution. Moreover, we evaluate the sensitivity of credit risk capital to dependence structure as modeled by asset correlations and elliptical copulas. Access to internal bank data collected by the prudential regulator distinguishes our research from other empirical studies on the IRB approach.
Keywords: Credit risk; regulatory capital; internal ratings-based (IRB) approach; asymptotic single risk factor (ASRF) model; credit value-at-risk (VaR); one-factor Gaussian copula, Student’s t copula
Rights: © World Scientific Publishing Company
RMID: 0030042397
DOI: 10.1142/S021902491550034X
Appears in Collections:Economics publications

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