Table Of ContentCredit Risk
Contributions to Economics
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Further volumes of this series can Alberto Quadrio CurziolMarco Fortis (Eds.)
be found at our homepage. Complexity and Industrial Clusters
2002. ISBN 3-7908-1471-7
Kirstin Hubrich Friedel BolleIMarco Lehmann-Waffenschmidt
Cointegration Analysis in a German (Eds.)
Monetary System Surveys in Experimental Economics
2001. ISBN 3-7908-1352-4 2002. ISBN 3-7908-1472-5
Nico Heerink et al. (Eds.) Pablo Coto-Millan
Economic Policy and Sustainable Land Use General Equilibrium and Welfare
2001. ISBN 3-7908-1351-6 2002. ISBN 7908-1491-1
Wojciech W. Charernza/Krystyna Strzala (Eds.)
Friedel BollelMichael Carlberg (Eds.)
East European Transition and EU
Advances in Behavioral Economics
Enlargement
2001. ISBN 3-7908-1358-3
2002. ISBN 3-7908-1501-2
Volker Grossmann Natalja von Westernhagen
Inequality, Economic Growth, and Systemic Transformation, Trade and
Technological Change Economic Growth
2001. ISBN 3-7908-1364-8 2002. ISBN 3-7908-1521-7
Thomas Riechmann Josef Falkinger
Learning in Economics A Theory of Employment in Firms
2001. ISBN 3-7908-1384-2 2002. ISBN 3-7908-1520-9
Miriam Beblo Engelbert Plassmann
Bargaining over Time Allocation Econometric Modelling of European Money
2001. ISBN 3-7908-1391-5 Demand
2003. ISBN 3-7908-1522-5
Peter Meusburger/Heike Jons (Eds.)
Transformations in Hungary Reginald LoyenlErik BuystlGreta Devos (Eds.)
2001. ISBN 3-7908-1412-1 Struggeling for Leadership:
Antwerp-Rotterdam Port Competition
Claus Brand between 1870-2000
Money Stock Control and Inflation Targeting 2003. ISBN 3-7908-1524-1
in Germany
Pablo Coto-Millan
2001. ISBN 3-7908-1393-1
Utility and Production, 2nd Edition
Erik Liith 2003. ISBN 3-7908-1423-7
Private Intergenerationai Transfers
Emilio Colombo/John Driffill (Eds.)
and Population Aging
The Role of Financial Markets
2001. ISBN 3-7908-1402-4 in the Transition Process
2003. ISBN 3-7908-0004-X
Nicole Pohl
Mobility in Space and Time Guido S. Merzoni
2001. ISBN 3-7908-1380-X Strategic Delegation in Firms
and in the Trade Uuion
Pablo Coto-Milhin (Ed.) 2003. ISBN 3-7908-1432-6
Essays on Microeconomics and Indnstrial
Organisation Jan B. Kune
2002. ISBN 3-7908-1390-7 On Global Aging
2003. ISBN 3-7908-0030-9
Mario A. Maggioni
Clnstering Dynamics and the Locations of Sugata Marjit, Rajat Acharyya
High-Tech-Firms International Trade, Wage Inequality
2002. ISBN 3-7908-1431-8 and the Developing Economy
2003. ISBN 3-7908-0031-7
Ludwig Schatzl/Javier Revilla Diez (Eds.)
Technological Change and Regional Francesco C. BillarilAlexia Prskawetz (Eds.)
Development in Europe Agent-Based Computational Demography
2002. ISBN 3-7908-1460-1 2003. ISBN 3-7908-1550-0
Georg Bol
Gholamreza N akhaeizadeh
Svetlozar T. Rachev
Thomas Ridder
Karl-Heinz Vollmer
Editors
Credit Risk
Measurement, Evaluation
and Management
With 85 Figures
and 47 Tables
Physica-Verlag
A Springer-Verlag Company
Preface
On March 13th - 15th 2002, the 8th Econometric Workshop in Karlsruhe was
held at the University of Karlsruhe (TH), Germany. The workshop was or
ganized jointly by the Institute for Statistics and Mathematical Economics
and the Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ
Bank AG, formerly SGZ-Bank AG). Almost 200 participants participated,
discussing new developments in the measurement, evaluation and management
of credit risk. This volume presents selected contributions to the conference,
of which a short survey follows:
Arne Benzin, Stefan Truck and Svetlozar T. Rachev present the main
features of the new Basel Capital Accord (Basel II). They include a survey of
the two regulatory approaches to credit risk: the standardized and the internal
rating based approach.
Christian Bluhm and Ludger Overbeck use the CreditMetrics/KMV one
factor model to discuss the quantification of systematic risk by estimation
of asset correlations in homogeneous portfolios. Based on this concept the
Basel-II proposal to fix asset correlation for corporate loans at the 20% level
is compared with empirical data.
Dylan D'Souza, Keyvan Amir-Atefi and Borjana Racheva-Jotova inves
tigate empirically how different distributional assumptions governing bond
price uncertainty effect the price of a credit default swap. They use the two
factor Hull-White-model and the extension of the fractional recovery model
of Duffie-Singleton given by Sch6nbucher. Prices are compared under the as
sumption of a Gaussian and a non-Gaussian distribution for the underlying
risk factors.
Christoph Heidelbach and Werner Kurzinger point out the consequences
of Basel II for the DaimlerChrysler Bank, a bank with a special profile as a
provider of automotive financial services.
Alexander Karmann and Dominik Maltritz present a quantification of the
probability that a nation will default on repayment obligations in foreign
currency. They adopt the approach introduced by Merton, considering as un
derlying process the nation's ability-to-pay modeled by the sum of future
Series Editors
Werner A. Muller
Martina Bihn
Editors Prof. Dr. Gholamreza Nakhaeizadeh
Prof. Dr. Georg Bol DaimlerChrysler AG
Prof. Dr. Svetlozar T. Rachev RIC/AM
Prof. Dr. Karl-Heinz Vollmer Postbox 2360
Institut fUr Statistik 89013 Ulm
und Mathematische Wirtschaftstheorie Germany
Universitat Karlsruhe
76128 Karlsruhe Dr. Thomas Ridder
Germany DZ Bank AG
COR
Platz der Republik
60265 Frankfurt am Main
Germany
E-Mails:
[email protected]
[email protected]
karl-heinz. [email protected]
[email protected]
[email protected]
ISSN 1431-1933
ISBN-13: 978-3-7908-0054-8 e-ISBN-13: 978-3-642-59365-9
DOl: 10.1007/978-3-642-59365-9
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SPIN 10924549 88/3130IDK-5 4 3 2 I 0
VI Preface
payment surpluses. The method is successfully demonstrated on the examples
of Latin America and Russia.
Rudiger Kiesel, William Perraudin and Alex Taylor examine the practical
aspects of using techniques from Extreme Value Theory (EVT) to estimate
Value-at-Risk (VAR). They compare the performance of EVT estimators with
estimators of VAR which are based on quantiles of empirical return distribu
tions. The two types of estimators are shown to yield almost identical results
for commonly used confidence levels.
Daniel Kluge and Frank Lehrbass consider default probabilities in struc
tured commodity finance. While banks usually base investment decisions on
cash flow modeling, they point out that the default risk of a project actually
depends on the "combined downside risk" of spot price and production level
movements. They present a workable approach to the measurement of this
risk.
Filip Landskog, Alexander McNeil and Uwe Schmock start from the fact
that some multivariate financial time series data are more plausibly modeled
by an elliptical distribution other than the multivariate normal distribution.
In that case, they propose estimation of the correlation by using Kendall's
tau and the relation between tau and the linear correlation coefficient. They
demonstrate that the well-known relation for the bivariate normal distribution
generalizes to the class of elliptical distributions.
Marlene Muller and Wolfgang HardIe present semiparametric extensions
of the logit-model which allow nonlinear relationships. The technique is based
on the theory of generalized partial linear models and is used for credit risk
scoring and the estimation of default probabilities.
Borjana Racheva-Jotova, Stoyan Stoyanov and Svetlozar T. Rachev illus
trate a new approach for integrated market and credit risk management using
Cognity software. The Cognity Credit Risk System comprises two models, the
Asset Value Approach and the Stochastic Default Rate Model, both based on
Stable distributions.
Thomas Rempel-Oberem, Rainer Klingeler and Peter Martin discuss a
novel approach to the determination of default events which was developed
for two different credit institutions. It is based on the CreditRisk+ model,
which was modified and extended to meet the particular requirements and
standards of these institutions.
Ingo SchaI states principles of internal rating systems for corporate clients
and presents his practical experience with building such systems. He pro
poses proceeding in two steps. First, each individual credit is evaluated with
respect to expected exposure at default, expected default frequency and ex
pected recovery rate. The second step is calculation of the correlations given
the portfolio structure. This permits active portfolio management. He also
describes how the quality of rating systems can be measured and gives basic
requirements for backtesting.
Frank Schlottmann and Detlev Seese are concerned with computational
aspects of the risk-return analysis of portfolios. They show that risk analysis
Preface VII
requires the computation of a set of Pareto-efficient portfolio structures in a
non-linear, nonconvex setting with additional constraints. They develop a new
fast and flexible framework for solving this problem, using a hybrid heuris
tic method which combines a multi-objective evolutionary algorithm with a
problem-specific local search. Empirical results demonstrate the advantage of
the procedure.
Rafael Schmidt develops a model of dependence using elliptical copulae.
He embeds the concepts of tail dependence and elliptical copulae into the
framework of Extreme Value Theory and provides a parametric and a non
parametric estimator for the tail dependence coefficient.
Finally, Stefan Truck and Jochen Peppel give a review on credit risk models
in practice. The first model is the structural model introduced by Merton and
modified to the "distance-to-default" methodology of KMV. The second class
are the Value-at-Risk models with CreditMetrics of JP Morgan, which use
historical transition matrices. The third major approach is that proposed by
Credit Suisse Financial Products with CreditRisk+. The paper closes with
a brief description of CreditPortfolioView by McKinsey and the one-factor
model proposed by the Basel Committee on banking supervision.
Many people have contributed to the success of the workshop: Irina
Gartvihs did the major part of organizing the workshop. Bernhard Martin,
Christian Menn, Theda Schmidt and Stefan Truck also proved indispensable
for its organization. Tim G61z and Matthias Rieber were responsible for the
technical infrastructure while Thomas Plum prepared the layout of the book.
All of their help is very much appreciated. The organization committee wishes
also to thank the Fakultat fur Wirtschaftswissenschaften, the dean Prof. Dr.
Hartmut Schmeck and the managing director Dr. Volker Binder for their co
operation. Last but not least we thank the DaimlerChrysler AG for their
sponsorship.
Karlsruhe, February 2003 The Editors
Contents
Approaches to Credit Risk in the New Basel Capital Accord
Arne Benzin, Stefan TrUck, Svetlozar T. Rachev . . . . . . . . . . . . . . . . . . . . . 1
Systematic Risk in Homogeneous Credit Portfolios
Christian Bluhm, Ludger Overbeck ................................ 35
Valuation of a Credit Default Swap: The Stable Non-Gaussian
versus the Gaussian Approach
Dylan D'Souza, Keyvan Amir-Ateji, Borjana Racheva-Jotova .......... 49
Basel II in the DaimlerChrysler Bank
Christoph Heidelbach, Werner Kurzinger ............................ 85
Sovereign Risk in a Structural Approach. Evaluating
Sovereign Ability-to-Pay and Probability of Default
Alexander Karmann, Dominik Maltritz ............................. 91
An Extreme Analysis of VaRs for Emerging Market
Benchmark Bonds
Rudiger Kiesel, William Perraudin, Alex Taylor ..................... 111
Default Probabilities in Structured Commodity Finance
Daniel Kluge, Frank Lehrbass ...................................... 139
Kendall's Tau for Elliptical Distributions
Filip Lindskog, Alexander McNeil, Uwe Schmock .................... 149
Exploring Credit Data
Marlene Muller, Wolfgang Hardle ................................. 157
Stable Non-Gaussian Credit Risk Model; The Cognity
Approach
Borjana Racheva-Jotova, Stoyan Stoyanov, Svetlozar T. Rachev ....... 175
X Contents
An Application of the CreditRisk+ Model
Thomas Rempel-Oberem, Rainer Klingeler, Peter Martin ............. 195
Internal Ratings for Corporate Clients
Ingo Schiil ...................................................... 207
Finding Constrained Downside Risk-Return Efficient
Credit Portfolio Structures Using Hybrid Multi-Objective
Evolutionary Computation
Frank Schlottmann, DetZef Seese ................................... 231
Credit Risk Modelling and Estimation via Elliptical Copulae
Rafael Schmidt .................................................. 267
Credit Risk Models in Practice - a Review
Stefan TrUck, lochen Peppel ....................................... 291
List of Authors ................................................ 331
A pproaches to Credit Risk in the New Basel
Capital Accord
Arne Benzin 1, Stefan Triick2, and Svetlozar T. Rachev3
1 Lehrstuhl fUr Versicherungswissenschaft, Universitat Karlsruhe, Germany
2 Institut fiir Statistik und Mathematische Wirtschaftstheorie, Universitat
Karlsruhe, Germany
3 Institut fiir Statistik und Mathematische Wirtschaftstheorie, Universitat
Karlsruhe, Germany
Summary. We discuss the main features of the new Basel Capital Accord (Basel
II) concerning the regulatory measurement of Credit Risk. After an overview of the
basic ideas in the new accord the determining aspects of the approaches to Credit
risk in the new capital accord are surveyed: the standardized approach (STD) as
well as the two forms of the internal rating based (IRB) approach -foundation and
advanced. We describe the issues of the second consultative document of the new
accord and describe how to measure the required capital. Further the fair comment
on several features of Basel II and its possible changes in the final version of the
accord are illustrated.
1 Introduction
1.1 The History of the Basel Capital Standards
More than a decade has passed since the Basel Committee on Banking Su
pervision4 (the Committee) introduced its 1988 Capital Accord (the Accord).
The major impetus for this Basel I Accord was the concern of the governors
of the central banks that the capital - as a "cushion" against losses - of
the world's major banks had become dangerously low after persistent erosion
through competition.
Since 1988 the business of banking, risk management practices, supervisory
approaches and financial markets have undergone significant transformations.
Consequently, the Committee released a proposal in June 1999 to replace the
old Accord with a more risk-sensitive framework, the New Basel Capital Ac
cord (Basel II). After receiving several comments by the industry and research
4 The Basel Committee on Banking Supervision (BCBS) is a committee of central
banks and bank supervisors from the major industrialised countries that meet
every three months at the Bank for International Settlements (BIS) in Basel.
G. Bol et al. (eds.), Credit Risk
© Physica-Verlag Heidelberg 2003
