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

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.
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International Review of Financial Analysis, Elsevier, 2007, vol. 16 (n° 1), pp. 1-21. 〈10.1016/j.irfa.2004.12.002〉
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Contributeur : Jérémy Savey <>
Soumis le : mercredi 16 février 2011 - 16:23:49
Dernière modification le : mercredi 16 février 2011 - 16:23:49

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J.P Chateau, Jian Wu. Basel II Capital Adequacy : Computing the "fair" Capital Charge for Loan Commitment "True" Credit Risk. International Review of Financial Analysis, Elsevier, 2007, vol. 16 (n° 1), pp. 1-21. 〈10.1016/j.irfa.2004.12.002〉. 〈hal-00566596〉

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