Calculating credit risk capital charges with the one-factor model

Susanne Emmer and Dirk Tasche

Journal of Risk

Abstract: ABSTRACT Even in the simple one-factor credit portfolio model that underlies the Basel II regulatory capital rules coming into force in 2007, the exact contributions to credit value-at-risk (VAR) can only be calculated with Monte Carlo simulation or with approximation algorithms that often involve numerical integration. As this may require a lot of computational time, there is a need for approximate analytical formulae. In this paper, we develop formulae according to two different approaches: the granularity adjustment approach initiated by M. Gordy and T. Wilde, and a semi-asymptotic approach. The application of the formulae is illustrated with a numerical example.

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