Some financial institutions can use internally developed credit risk models to determine their capital requirements. At the same time, the regulatory framework governing such models allows institutions to implement diverse rating systems with no specified penalty for poor model performance. To...

Following the financial crisis, the share of non-performing loans has significantly increased, while the regulatory guidelines on the Internal-Ratings Based (IRB) approach for capital adequacy calculation related to defaulted exposures remains too general. As a result, the high-risk nature of...