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Systematic credit cycle risk of financial collaterals: Modelling and evidence

Marc Gürtler and Dirk Heithecker

No FW15V2, Working Papers from Technische Universität Braunschweig, Institute of Finance

Abstract: According to the new capital adequacy framework (Basel II) finally adopted by the Basel Committee in June 2004 the eligibility of collaterals, especially financial collaterals, is extended in comparison to the existing rules. However, financial assets are valued conservatively in the credit context which suggests a strong correlation between collaterals and credit default rates. This paper discusses the impact of the dependency of financial collaterals and default rates on credit risk. Therefore, a general calculation framework for the loss rate of collateralized loans is given and an analytical solution for the valuation of financial collaterals is presented. Finally, the model is applied on empirical data of German insolvencies and German capital markets.

Keywords: Basel II; Capital Adequacy Requirements; Value at Risk; Loss Given Default; Probability of Default; Collateral; Collateral Valuation (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2005
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