The Basel II Risk Parameters Estimation, Validation, Stress Testing
The estimation and the validation of the Basel II risk parameters PD (default probability), LGD (loss given fault), and EAD (exposure at default) is an important problem in banking practice. These parameters are used on the one hand as inputs to credit po
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Bernd Engelmann
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Robert Rauhmeier
Editors
The Basel II Risk Parameters Estimation, Validation, Stress Testing – with Applications to Loan Risk Management
Editors Dr. Bernd Engelmann [email protected]
Dr. Robert Rauhmeier [email protected]
ISBN 978-3-642-16113-1 e-ISBN 978-3-642-16114-8 DOI 10.1007/978-3-642-16114-8 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011924881 # Springer-Verlag Berlin Heidelberg 2006, 2011 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg, Germany Printed on acid-free paper Springer is part of Springer ScienceþBusiness Media (www.springer.com)
Preface to the Second Edition
The years after the first edition of this book appeared have been very turbulent. We have seen one of the largest financial crisis in the history of the global financial system. Banks which existed since more than one century have disappeared or had to be rescued by the state. Although Basel II has been implemented by many banks so far and still a lot of effort is spent in improving credit risk management by building up rating systems and procedures for estimating the loan loss parameters PD, LGD, and EAD, there is still a feeling that this is insufficient to prevent the financial system from further crisis. There are ongoing discussions how the financial system can be stabilized by either improving the regulatory framework or the internal risk management of banks. During the time when we worked on this second edition, the regulatory framework Basel III has been discussed. The basic idea behind Basel III is extending the capital basis of banks. It is not the aim of Basel III to improve the methods and processes of banks’ internal credit risk management but simply to improve system stability by increasing capital buffers. Since we did not view this book as a book on regulation (although it was motivated by a regulatory framework) but as a book on risk management, we do not discuss the current regulatory ideas in this edition. Instead, we focus on one of the causes for the financial crisis, the lending behaviour of banks in the retail sector. By retail, we mean lending to debtors where no market information on their cr
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