 Marking-to-model credit and operational risks of loan commitments: A Basel-2 advanced internal ratings-based approachJohn-Peter D. Chateau International Review of Financial Analysis, 2009, vol. 18, issue 5, 260-270 Abstract: Within a marking-to-model framework, this research computes the bank's capital charge for credit and operational risks of loan commitments at Basel-2 fixed audit date. This is done in three steps. The first one prices commitment credit risk as a Gram-Charlier put value and determines the commitment forward-funding proportion. In the second one, put value and funding proportion are combined to compute Basel-2 'fair' capital charge for credit and operational risks. By producing a moderate total capital charge, marking-to-model offers substantial capital relief with respect to the corresponding charge computed with Basel-2 simplified approach. Both charges are however larger than the corresponding nil charge arrived at in Basel-1. In the third step, marking-to-model reveals its flexibility by showing how banks can determine the cost of their exposure to borrowers' credit-rating downgrades and how they can also hedge any exposure to commitment default risk. Keywords: Constrained; Gram-Charlier; put; Forward; funding; proportion; Marking; to; model; versus; Basel-2; simplified; approach; Credit-risk; downgrades; Hedging; commitment; default; risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:18:y:2009:i:5:p:260-270 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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