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Systematic credit cycle risk of financial collaterals: Modelling and evidence

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  • Gürtler, Marc
  • Heithecker, Dirk

Abstract

According to the new capital adequacy framework (Basel II) finally adopted by the Basel Committee in June 2004 the eligibility of collaterals, especially financial collaterals, is extended in comparison to the existing rules. However, financial assets are valued conservatively in the credit context which suggests a strong correlation between collaterals and credit default rates. This paper discusses the impact of the dependency of financial collaterals and default rates on credit risk. Therefore, a general calculation framework for the loss rate of collateralized loans is given and an analytical solution for the valuation of financial collaterals is presented. Finally, the model is applied on empirical data of German insolvencies and German capital markets.

Suggested Citation

  • Gürtler, Marc & Heithecker, Dirk, 2005. "Systematic credit cycle risk of financial collaterals: Modelling and evidence," Working Papers FW15V2, Technische Universität Braunschweig, Institute of Finance.
    • Handle: RePEc:zbw:tbsifw:fw15v2
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    References listed on IDEAS

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    Cited by:

    1. Klaus Rheinberger & Martin Summer, 2008. "Credit portfolio risk and asset price cycles," Computational Management Science, Springer, vol. 5(4), pages 337-354, October.

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    More about this item

    Keywords

    Basel II; Capital Adequacy Requirements; Value at Risk; Loss Given Default; Probability of Default; Collateral; Collateral Valuation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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