Calculating Credit Risk Capital
Rosen D., 2004, Chapter III.B.6 of Professional Risk Manager Handbook (C. Alexander and E. Sheedy eds.), Professional Risk Managers International Association (PRMIA), pp.13-42
Topics covered in this chapter include:
• how credit portfolio models must be defined and parameterised consistently to measure ECC from a bottom-up approach;
• the basic rules for computing minimum credit capital under the Basel I Accord;
• the rules for computing minimum capital requirement for credit risk in the Basel II Accord (Pillar I) – we cover various types of exposure and comment on the special credit capital considerations under Pillar II;
• the Basel II treatment for internal ratings systems and probability of default estimation, as well as the minimum standards for credit monitoring processes and validation methods.
Section III.B.6.7 covers some advanced topics: the applications of risk contribution methodologies ECC allocation, as well as the shortcomings of value-at-risk (VaR) for ECC and coherent risk measures.