The Single Risk Factor Approach to Capital Charges in Case of Correlated Loss Given Default Rates

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The Single Risk Factor Approach to Capital Charges in Case of Correlated Loss Given Default Rates

by Dirk Tasche of Deutsche Bundesbank

February 17, 2004

Abstract: A new methodology for incorporating LGD correlation effects into the Basel II risk weight functions is introduced. This methodology is based on modelling of LGD and default event with a single loss variable. The resulting formulas for capital charges are numerically compared to the current proposals by the Basel Committee on Banking Supervision.

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