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CREDIT RISK MODELLING: CURRENT PRACTICES AND …

CREDIT RISK MODELLING: CURRENT PRACTICESANDAPPLICATIONSB asle Committee on Banking SupervisionBasleApril 1999 TABLE OF CONTENTSList of ParticipantsExecutive SummaryPart I:Introduction1. Overview .. 82. Internal Applications of CREDIT Risk Models .. 93. Key Challenges to Regulatory 104. Organisation of Report .. 11 Part II:Overview of Conceptual Approaches to CREDIT Risk Modelling1. Economic Capital Allocation .. 13A. Probability Density Function of CREDIT Losses .. 13B. Key Issues .. 162. Measuring CREDIT Loss .. 16A. Time Horizon .. 16B. Default-Mode 17An Illustration: The Mean/Standard Deviation 18 Internal Risk Rating Systems, EDFs, Transition 19C. Mark-to-Market Paradigm .. 22 Discounted Contracual Cash Flow 22 Risk-Neutral Valuation 23D. Key Issues .. 243. Probability Density Functions .. 26A. 26B. Key Issues .. 274. Conditional versus Unconditional Models.

section. (The Appendix to the report provides a matrix summary of other key issues.) Conceptual methodology The Task Force observed a range of practices in the conceptual approaches to modelling. We would welcome a dialogue with the industry in order to assess the materiality

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