Treatment of Double Default Effects within the Granularity Adjustment for Basel II

Sebastian Ebert and Eva Lütkebohmert

No 10/2009, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversi?ed away. The impact of undiversi?ed idiosyncratic risk on portfolio Value-at-Risk can be quanti?ed via a granularity adjustment (GA). We provide an analytic formula for the GA in an extended single- factor CreditRisk+ setting incorporating double default e?ects. It accounts for guarantees and their e?ect of reducing credit risk in the portfolio. 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.

Keywords: analytic approximation; Basel II; counterparty risk; double default; granularity adjustment; IRB approach; securitization (search for similar items in EconPapers)
JEL-codes: G28 G31 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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