Transcription of Granularity Adjustment for Regulatory Capital …
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Granularity Adjustment for Regulatory Capital …
Granularity Adjustment for RegulatoryCapital assessment Michael B. Gordyaand Eva L utkebohmertbaFederal Reserve BoardbUniversity of FreiburgThe credit value-at-risk model underpinning the internalratings-based approach of Basel II and III assumes that idio-syncratic risk has been fully diversified in the portfolio, so thateconomic Capital depends only on systematic risk contribu-tions. We propose a simplegranularity Adjustment (GA) forapproximating the effect of undiversified idiosyncratic risk onrequired Capital . To mitigate operational burden in implemen-tation, we derive upper and lower bounds on the GA underincomplete information on the portfolio.
Granularity Adjustment for Regulatory Capital Assessment∗ Michael B. Gordya and Eva L¨utkebohmertb aFederal Reserve Board bUniversity of Freiburg The credit value-at-risk model underpinning the internal
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