Basel II Implementation

A Guide to Developing and Validating a compliant Internal Risk Rating System

Introduction xi
Chapter 1
Risk Ratings System Design 1
Overview 1
The Use of Credit Risk Assessment Templates in IRRS 2
The Use of Quantitative Models in IRRS 6
The Use of Hybrid Models in IRRS 10
The Use of Retail Models in IRRS 14
The Use of LGD Models in IRRS 16
The Choice of LGD Discount Rate 19
Discount Rate for Workout Recoveries: An Empirical Study 21
Conclusions 63
Chapter 2
Risk Ratings System Quantification 65
Overview 65
Risk Rating Philosophy 67
Long-run PD 77
Downturn LGD 96
Downturn EAD 122
Downturn LGD: A Case Study 124
Establishing a Master Scale 134
Stress Testing 138
EAD Estimation 171Chapter 3
Validation of Internal Risk Rating System 183
Overview 183
Confirmation of the Conceptual Soundness and Initial Risk Quantification
of the Design of the IRRS 184
Confirmation of Risk Rating System Operations 200
Annual Examination of the Overall Performance
of the Risk Rating System 203
Validation of Mappings between Internal and
External Risk Rating Systems 269
Annual Health Check 271
Governance 271
Conclusions 278
Chapter 4
Pillar II, Challenges, and Dealing with Procyclicality 281
Introduction 281
Background Definitions 282
Some Pillar II Implementation Issues 290
Capital Planning and Capital Adequacy Assessment
Framework with Respect to Pillar II 296
Conclusions 303