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| Calibrating Low-Default Portfolios, using the Cumulative Accuracy Profile by Marco van der Burgt of ABN AMRO Bank March 2007 Abstract: In the new Basel II Accord, banks are allowed to develop their own credit rating models provided that they regularly perform a back test of the risk parameters. However, the lack of sufficient (default) data for back testing rating models for "low-default portfolios" is a main concern in financial industry and regulators. These low-default portfolios are characterized by the lack of sufficient data and the resulting difficulty in back-testing the Probability of Default. Examples of low-default portfolios are high-quality borrowers, banks, sovereign, insurance companies and some categories of specialized lending. This article presents a method of calibrating low-default portfolios. The method is based on modelling the observed power curve and deriving the calibration from this curve. The functional form of the power curve determined by a concavity parameter, which can easily be related to the area under the power curve and the Accuracy Ratio (AR). The method is demonstrated for sovereign ratings. Keywords: low-default portfolio, power curve, accuracy ratio. Books Referenced in this Paper: (what is this?)
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