Basel II implementation requires the estimations of probability of default (PD) and migration rate under hypothetical or historically observed stress scenarios. Typically, financial institutions first forecast selected macroeconomic variables under these stress scenarios and then estimate the...

Basel II adopting banks estimate and validate Long-Run Probability of Default (LRPD) for each of their Internal Risk Ratings (IRRs). In this study, we examine alternative methodologies in estimating and validating LRPD. We propose the maximum likelihood estimators incorporating both...

Banks around the globe are implementing IFRS 9 which is a considerable effort. A key element of IFRS 9 is a forward-looking “expected loss” impairment model, which is a significant shift from the current incurred loss model. In this paper, we examine how we may use A-IRB models in the...

In order to comply with the Advanced Internal Rating-Based (IRB) approach of Basel II, financial institutions need to estimate the economic loss given default (LGD) of their instruments in order to compute the minimum regulatory capital requirement under Pillar I of the accord. One of the key...

In the aftermath of the financial crisis, to reinforce the stability of the financial system, policy makers and the Basel Committee have developed proposals to ensure that financial institutions maintain sufficient capital buffers. The December proposal by the Basel Committee outlines...