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Title:Treatment of double default effects within the granularity adjustment for Basel II PDF Logo
Authors:Ebert, Sebastian
Lütkebohmert, Eva
Issue Date:2009
Series/Report no.:Bonn econ discussion papers 2009,10
Abstract:Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversified away. The impact of undiversified idiosyncratic risk on portfolio Value-at-Risk can be quantified via a granularity adjustment (GA). We provide an analytic formula for the GA in an extended singlefactor CreditRisk setting incorporating double default effects. It accounts for guarantees and their effect of reducing credit risk in theportfolio. Our general GA very well suits for application under Pillar 2 of Basel II as the data inputs are drawn from quantities already required for the calculation of IRB capital charges.
Subjects:analytic approximation
Basel II
counterparty risk
double default
granularity adjustment
IRB approach
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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