The measure of model risk in credit capital requirements

Roberto Baviera

Finance Research Letters, 2022, vol. 44, issue C

Abstract: Credit capital requirements in Internal Rating Based approaches require the calibration of two key parameters: the probability of default and the loss-given-default. This letter considers the uncertainty about these two parameters and models this uncertainty in an elementary way: it shows how this estimation risk can be computed and properly taken into account in regulatory capital.

Keywords: Regulatory capital; estimation risk; VaR; IRB approach; LGD-PD dependency; scaling factor (search for similar items in EconPapers)
JEL-codes: C51 G21 G28 G32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001458

DOI: 10.1016/j.frl.2021.102064

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