The review of the open challenges in the IRB loan portfolio credit risk modeling

Abstract

The Basel Committee on Banking Supervision finalized the Basel III accord in the December 2017 and launched the set of its standards – the Basel Framework – in December 2019. Both documents allow bank to use mathematical models for the credit risk estimation. There are quantitative and qualitative requirements for models to be allowed for use in the prudential regulation of banks. The approach is called an Internal-Ratings-Based one (IRB). This paper aims at discussing a set of issues related to IRB credit risk modeling and such model estimates use. Those issues include data pooling in the credit registries, applying copula-discriminant analysis, validating the borrower concentration per grade, assigning the hybrid credit rating, use of model estimates when voting at the credit committee, estimate of the ultimate credit risk-taking by banks.