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The single risk factor approach to capital charges in case of correlated loss given default rates

Dirk Tasche

cond-mat.otherarXiv:cond-mat/0402390

Abstract

A new methodology for incorporating LGD correlation effects into the Basel II risk weight functions is introduced. This methodology is based on modelling of LGD and default event with a single loss variable. The resulting formulas for capital charges are numerically compared to the current proposals by the Basel Committee on Banking Supervision. Keywords: Regulatory capital charge, loss given default (LGD).

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