Default Risk Charge: Modeling Framework for the 'Basel' Risk Measure

Journal of Risk, Vol. 19, No. 4, 2017, pp. 23-50.

Posted: 2 Aug 2015 Last revised: 31 Mar 2017

Date Written: March 30, 2017

Abstract

Revised standards for capital requirements for market risks in a bank’s trading book have been issued as a result of the Fundamental Review of the Trading Book. Under the new standards, default risk needs to be measured and capitalized through a dedicated Default Risk Charge (DRC). While quantitative impact studies are ongoing and banks are preparing for these regulatory changes, this paper is the first to present a modeling framework for the DRC measure that projects losses over a one-year capital horizon at a 99.9% confidence level. The article discusses selected risk factor models to derive simulation-based loss distributions and the associated default risk figures. Model properties, implementation aspects and a comparison to the Standardised Approach for default risk are explored through the use of example portfolios.

Keywords: Banking Regulation; Risk Modeling; Market Risk; Fundamental Review of the Trading Book; Default Risk Charge

JEL Classification: G13, G18

Suggested Citation

Wilkens, Sascha and Predescu, Mirela, Default Risk Charge: Modeling Framework for the 'Basel' Risk Measure (March 30, 2017). Journal of Risk, Vol. 19, No. 4, 2017, pp. 23-50.. Available at SSRN: https://ssrn.com/abstract=2638415 or http://dx.doi.org/10.2139/ssrn.2638415

Sascha Wilkens (Contact Author)

Independent

No Address Available

Mirela Predescu

BNP Paribas, London ( email )

10 Harewood Avenue
London, NW1 6AA
United Kingdom

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