Basel II Implementation, Chapter 3 - Validation of Internal Risk Rating System, Part 3
This is a sample chapter from Basel II Implementation, an invaluable guide that puts a potent combination of theory and real-world practice at your fingertips. Written by two of the most globally recognized and sought-after thought leaders in Basel II implementation, this how-to book maps out, step-by-step, implementable solutions that are both academically credible and practical, making them defendable to regulators and executable within the constraints of data, resources, and time.
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Confirmation of Risk Rating System Operations
Annual Examination of the Overall Performance of the Risk Rating System
Validation of Mappings between Internal and External Risk Rating Systems
Annual Health Check
accuracy ratio asset correlation assigned PDs bank bank’s Basel Basel II benchmarking calibration test capital estimation CLAR curve commercial conceptual soundness confidence interval confidence level credit risk dft-1yr discriminatory power EAD factors economic capital Equation example expected exposure external ratings Figure geometric mean Gini score grid pricing Hoeffding inequality homogeneity independent internal risk rating IRRS LGD backtesting LGD observations LGD rating LGD risk rating LGD value loans long-run PD maturity migration mobility metric Monte Carlo simulation na´ve model null hypothesis number of defaults number of obligors observed default rates overrides performance predicted and realized predicted band predicted LGD predicted mean LGD prior to default realized band realized default rates regression analysis reject the hypothesis risk bucket risk drivers risk horizon risk rating philosophy risk rating system sample data sample mean Standard & Poor’s subportfolio-level validation subportfolios t-distribution Table transition matrix type I error Undrawn validation exercise