Validation of Credit Risk Models
Posted: 30 Oct 2012
Date Written: November 1, 2004
The Basel Committee on Banking Supervision has been working since 1999 on a revision of the 1998 regulation on capital requirements (Basel II). According to the new regulation to be implemented by the end of 2006, many banks will want to calculate the amount of regulatory capital requirements on the basis of default probabilities estimated from internal credit ratings. But the creation, calibration and validation of a credit risk model raise many technical questions and issues: How to measure the credit risk itself? How to obtain a realistic migration matrix? What kind of computational models to use? How to take into account the business cycles? How to properly calibrate the correlations in the model?
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