Basel II Capital Adequacy: Computing the "fair" Capital Charge for Loan Commitment "True" Credit Risk

J.p Chateau and Jian Wu
Additional contact information
J.p Chateau: Pôle de Recherche - Rouen Business School - Rouen Business School
Jian Wu: Pôle Finance Responsable - Rouen Business School - Rouen Business School

Post-Print from HAL

Abstract: This research makes two contributions: (i) to price analytically put option and extension premium embedded in a borrower-extendible commitment, and (ii) to compute the "fair" capital charge that corresponds to the commitment "true" credit risk. In doing so, the procedure replaces the BIS accountingbased concepts of credit-conversion factor, principal-risk factor, and initial term to maturity of irrevocable commitments with the market-based concepts of exercise-cum-takedown proportion and put value implicit in the borrower-extendible commitment, respectively. Finally, the approach is developed one step further to account for the borrowers' risk ratings by public credit agencies; this results in a two-dimensional (timestate of nature) risk-weighting system that applies to all commitment types.

Keywords: Put option embedded in borrower-extendible commitments; Exercise-cum-takedown proportion; "Fair" capital charge for commitment "true" credit risk; Fair" capital charge for commitment "true" credit risk (search for similar items in EconPapers)
Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in International Review of Financial Analysis, 2007, vol. 16 (n° 1), pp. 1-21. ⟨10.1016/j.irfa.2004.12.002⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00566596

DOI: 10.1016/j.irfa.2004.12.002

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().