Basel II Implementation: A Guide to Developing and Validating a Compliant, Internal Risk Rating System

by Ozdemir, Bogie; Miu, Peter

• ISBN13: 9780071591300
• ISBN10: 0071591303
• Edition: 1st
• Format: Package
• Copyright: 2008-10-03
• Publisher: McGraw-Hill Education

Summary

Many financial institutions around the world must prove minimum compliance to the Basel II Accord by 2015. For several banks, implementing internal risk rating systems (IRRS) is simply Basel II compliance. However, when carried out with a proper focus on bottom-line growth, this regulation has been shown to enhance a bank's risk-management practices and competitiveness in the market.Basel II Implementationis an invaluable guide that puts a potent combination of theory and real-world practice at your fingertips.Written by two of the most globally recognized and sought-after thought leaders in Basel II implementation, this how-to book maps out, step-by-step, implementable solutions that are both academically credible and practical, making them defendable to regulators and executable within the constraints of data, resources, and time. Organized to sequentially follow IRRS development under Basel II, each section of this go-to guide provides: An introduction to the Basel II concept A variety of techniques for reaching compliance, based on research conducted by the authors and supported by Standard & Poor's Corporate case examples that illustrate implementation in the real worldTo complement the holistic approach inBasel II Implementation, which offers end-to-end analysis of various credit risk problems, an accompanying CD-ROM features a wealth of useful spreadsheet templates that will facilitate the efficient and accurate execution of covered techniques.Stay ahead of the curve with the expert strategies and advice found in Basel II Implementation.

Author Biography

Bogie Ozdemir is Director of Standard & Poor’sRisk Solution, a Financial Risk Manager with GARP, and a certified RiskManager.

Peter Miu is Standard & Poor’s Consultant forCanadian and Korean Basel II Implementation.

Table of Contents

Risk Ratings System Design	p. 1
Overview	p. 1
The Use of Credit Risk Assessment Templates in IRRS	p. 2
The Use of Quantitative Models in IRRS	p. 6
The Use of Hybrid Models in IRRS	p. 10
The Use of Retail Models in IRRS	p. 14
The Use of LGD Models in IRRS	p. 16
The Choice of LGD Discount Rate	p. 19
Discount Rate for Workout Recoveries: An Empirical Study	p. 21
Conclusions	p. 63
Risk Ratings System Quantification	p. 65
Overview	p. 65
Risk Rating Philosophy	p. 67
Long-run PD	p. 77
Downturn LGD	p. 96
Downturn EAD	p. 122
Downturn LGD: A Case Study	p. 124
Establishing a Master Scale	p. 134
Stress Testing	p. 138
EAD Estimation	p. 171
Validation of Internal Risk Rating System	p. 183
Overview	p. 183
Confirmation of the Conceptual Soundness and Initial Risk Quantification of the Design of the IRRS	p. 184
Confirmation of Risk Rating System Operations	p. 200
Annual Examination of the Overall Performance of the Risk Rating System	p. 203
Validation of Mappings between Internal and External Risk Rating Systems	p. 269
Annual Health Check	p. 271
Governance	p. 271
Conclusions	p. 278
Pillar II, Challenges, and Dealing with Procyclicality	p. 281
Introduction	p. 281
Background Definitions	p. 282
Some Pillar II Implementation Issues	p. 290
Capital Planning and Capital Adequacy Assessment Framework with Respect to Pillar II	p. 296
Conclusions	p. 303
Notes	p. 305
Index	p. 319
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