Journal of Financial Intermediation Vol. 12 No. 3 2003
A risk-factor model foundation for ratings-based bank capital rules
open access
Abstract
I demonstrate that ratings-based capital rules, including both the current Basel Accord and its proposed revision, can be reconciled with the general class of credit value-at-risk models. Each exposure's contribution to VaR is portfolio-invariant only if (a) dependence across exposures is driven by a single systematic risk factor, and (b) no exposure accounts for more than an arbitrarily small share of total portfolio exposure. Analysis of rates of convergence to asymptotic VaR leads to a simple and accurate portfolio-level add-on charge for undiversified idiosyncratic risk. There is no similarly simple way to address violation of the single factor assumption.
- DOI
- 10.1016/s1042-9573(03)00040-8
- Volume
- 12
- Issue
- 3
- Pages
- 199-232
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref