Abstract
The interest is calculated such that all the non-defaulting clients are also paying for the defaulting ones – this is a kind of insurance-like approach. Statistically in each year a certain fraction of clients will default. If the calibration of the probabilities of default (PD) forecast by the rating systems is lower than the realized default rates the bank has to do additional write-offs. If there are securities like mortgages these write-offs are reduced as the bank gets back some of the money.
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Notes
- 1.
Bank of England: Consultation Paper, CP4/13, “Credit Risk: Internal Ratings Based Approaches,” March (2013).
- 2.
www.bundesbank.de – “Zulassungsverfahren”.
References
Bank of England: Consultation paper, CP4/13, “Credit risk: Internal ratings based approaches,” March 2013.
Wüest & Partner Schweiz. (2011).
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Wernz, J. (2014). Risk Modeling and Capital: Credit Risk (Loans). In: Bank Management and Control. Management for Professionals. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-40374-3_4
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DOI: https://doi.org/10.1007/978-3-642-40374-3_4
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