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Risk (Credit Risk (Key attributes (Credit deterioration risk, Default…
Risk
Credit Risk
Key attributes
Credit deterioration risk
Default risk
Key metrics
Risk-Weighted Assets (RWA)
SUM(Risk Weights
Assets Amount for on-balance) + SUM(Risk Weights
Credit equivalent amount for off-balance)
Credit equivalent amount
To quantify Credit Risk for off-balance sheet instruments
Provided by a regulator in Standardized Approach (STA)
Approach to calculate
Standatized
Internal rating based (IRB)
Components
Risk weighted functions
Defined by Basel II-III Accords
Minimum requirements
Composition
Complience
Risk Rating Design
Corporate Governance
Disclosure
Risk parameters
Exposure at Default (EAD)
Is a measure of the extent in which bank is exposed to the counterparty in case when counterparty defaults
Loss Given Default (LGD)
Is the percentage of loss over the total exposure, in case when counterparty defaults
Maturity (M)
The final payment date of a loan or other financial instrument/security
Probability of default (PD)
Is the likelihood of a default over the time horizon
after 90 days the counterparty is defaulted
Types
Foundational Internal Rating- based (F-IRB)
Compute PD by them selves
All other parameters should be used as provided by regulator
Advanced Internal Rating Based (A-IRB)
Compute all parameters by themselves
Should be aligned with minimal requirements guidelines
Examples
Merton's model
Moody's KMV model
Credit Suisse CR+
Types
Operational risk
Market risk
Credit risk
Rules
Basel Accords