Abstract
The capital requirements derived from the Basel Accord were issued with the purpose of deploying a transnational regulatory framework. Further regulatory developments on risk measurement is included across several documents published both by the European Banking Authority and the European Central Bank. Among others, the referred additional documentation focused on the models’ estimation and calibration for credit risk measurement purposes, especially the Advanced Internal-Ratings Based models, which may be estimated both for non-defaulted and defaulted assets. A concrete proposal of the referred defaulted exposures models, namely the Expected Loss Best Estimate (ELBE) and the Loss Given Default (LGD) in-default, is presented. The proposed methodology is eventually calibrated on the basis of data from the mortgage’s portfolios of the six largest financial institutions in Spain. The outcome allows for a comparison of the risk profile particularities attached to each of the referred portfolios. Eventually, the economic sense of the results is analyzed.
Highlights
An international banking regulation framework has been promoted by means of the Basel Accord [1]
According to CRR, the models for defaulted exposures shall be based on the estimation of the Expected Loss Best Estimate (ELBE) and the Loss Given Default (LGD) in-default
The calibration, carried out on the basis of the ELBE methodology, which is reflected in Equation (1), is based on the already defined sets of reference and leads to the following results split by the institution and across time in default (Figure 2)
Summary
An international banking regulation framework has been promoted by means of the Basel Accord [1]. Its implementation regarding the capital calculation, articulated via the Capital Requirements Regulation (CRR, see Reference [2]), has been rolled out across. Certain methods are permitted by law in this regard, namely, the standard approach and the Internal-Ratings Based (IRB). Approach, which, in turn, is split between foundation and advanced. There are two types of exposures for which the Advanced IRB models may be estimated: defaulted and non-defaulted. According to CRR, the models for defaulted exposures shall be based on the estimation of the Expected Loss Best Estimate (ELBE) and the Loss Given Default (LGD) in-default
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