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Basel II Capital Adequacy : Computing the "fair" Capital Charge for Loan Commitment "True" Credit Risk

Author

Listed:
  • J.P Chateau

    (Pôle de Recherche - Rouen Business School - Rouen Business School)

  • Jian Wu

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

Abstract

This research makes two contributions: (i) to price analytically put option and extension premium embedded in a borrower-extendible commitment, and (ii) to compute the "fair" capital charge that corresponds to the commitment "true" credit risk. In doing so, the procedure replaces the BIS accountingbased concepts of credit-conversion factor, principal-risk factor, and initial term to maturity of irrevocable commitments with the market-based concepts of exercise-cum-takedown proportion and put value implicit in the borrower-extendible commitment, respectively. Finally, the approach is developed one step further to account for the borrowers' risk ratings by public credit agencies; this results in a two-dimensional (timestate of nature) risk-weighting system that applies to all commitment types.

Suggested Citation

  • J.P Chateau & Jian Wu, 2007. "Basel II Capital Adequacy : Computing the "fair" Capital Charge for Loan Commitment "True" Credit Risk," Post-Print hal-00566596, HAL.
    • Handle: RePEc:hal:journl:hal-00566596
    DOI: 10.1016/j.irfa.2004.12.002
    as

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    Cited by:

    1. Chateau, Jean-Pierre D., 2011. "Contribution à la réglementation de Bâle-3 : de la consistance interne du continuum du crédit commercial en marquant à la « valeur de modèle » le risque de crédit des engagements de crédit," L'Actualité Economique, Société Canadienne de Science Economique, vol. 87(4), pages 445-479, décembre.

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