Multi-Year Dynamics for Forecasting Economic and Regulatory Capital in Banking

Daniel Roesch and Harald Scheule
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Daniel Roesch: University of Regensburg

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: The determination of future credit loss distributions constitutes a fundamental challenge in many credit risk applications such as the calculation of economic and regulatory capital as well as the pricing of loans, portfolios or derivatives thereof. Currently, best practice is to assume a one-year risk horizon for the derivation of the credit loss distribution. However, the maturities of most credit risky products exceed one year and the credit loss of the whole product life has to be taken into account. The present article investigates the impact of multi-year forecasts of credit risk parameters such as probabilities of default and correlations on the distribution of future losses to a credit portfolio. Moreover, the implications are demonstrated for collateralized debt obligations.

Keywords: Business Cycle; Correlation; Credit Risk; Basel II; Point-in-Time; Portfolio; Through-the-Cycle (search for similar items in EconPapers)
JEL-codes: C51 G20 G28 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2007-01-01
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Citations: View citations in EconPapers (5)

Published as: Roesch, D. and Scheule, H., 2007, "Multi-year dynamics for forecasting economic and regulatory capital in banking", The Journal of Credit Risk, 3(4), 113-134.

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Persistent link: https://EconPapers.repec.org/RePEc:uts:ppaper:2007-2

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