The single risk factor approach to capital charges in case of correlated loss given default rates

摘要

A new methodology for incorporating LGD correlation effects into the Basel IIrisk weight functions is introduced. This methodology is based on modelling ofLGD and default event with a single loss variable. The resulting formulas forcapital charges are numerically compared to the current proposals by the BaselCommittee on Banking Supervision. Keywords: Regulatory capital charge, loss given default (LGD).