Applying Basel2 AIRB Model to CCAR Stress Testing

18 Pages Posted: 6 Nov 2013

See all articles by Steven H. Zhu

Steven H. Zhu

Banc of America Merrill Lynch; Morgan Stanley

Date Written: March 15, 2013

Abstract

The stressed probability of default and rating migration are important for the banks to assess the adequacy of credit reserve and credit capital under the stress market condition. Credit reserves are designed to cover the expected loss which can be estimated by the through-the-cycle probability of default, while the credit capital is designed to cover the unexpected loss which only occurs under downturn economy or extreme market condition. This paper describes a methodology of estimating the default and rating transitions across industry and regional segmentation that can be applied to wholesale credit portfolio for estimating the stressed losses and allowance for loss on loan and lease, under macro-economic scenarios such as prescribed in the Fed annual CCAR stress testing.

Keywords: PD, ALLL, CCAR, Stress Test, Credit Cycle, Risk Metrics, Basel2 AIRB

Suggested Citation

Zhu, Steven H., Applying Basel2 AIRB Model to CCAR Stress Testing (March 15, 2013). Available at SSRN: https://ssrn.com/abstract=2349136 or http://dx.doi.org/10.2139/ssrn.2349136

Steven H. Zhu (Contact Author)

Banc of America Merrill Lynch ( email )

Bank of America Plaza
335 Madison Ave, 5th Floor
New York, NY 10017
United States
646-855-1853 (Phone)

HOME PAGE: http://www.riskwhoswho.com/Charter-Members.html

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

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