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34
BANK-FORUM
The current Basel II discus- One possible method of PD rating systems or for data
sion focuses on the unexpect- estimation is based on histori- pooling, both the rating
ed loss and excludes the ex- cal data, where estimates are processes and the definition
pected loss from the risk weigh- made per each rating grade. of default have to be identi-
ting functions. As a consequen- cal.
ce, provisions must be built in The key element in PD esti-
for the amount of expected mation is the definition of de- The calculation of the histor-
loss according to internal loss fault. Definitions which trig- ical PD is not very complex.
data. The probability of de- ger earlier defaults will auto- The PD itself does not include
fault (PD) is now one of the matically produce higher PDs. a loss component but only the
key parameters in the calcula- Also, in order to be able to number of defaults within the
tion of expected losses. compare PDs across different given time period.
Basel II requires banks to esti- where each obligor is placed is required in Basel II). In this
mate 1-year PDs based on according to his rating at the way there will be less variation
long-term averages. This can beginning of the year, and in the PD estimation from year
be achieved by generating taking the average of the to year.
yearly pseudo-obligor pools, pools (a minimum of five years
2002 2003
1300 32 1320 35
PD = Defaults / Obligors
Avg. PD: (Obligors * PD) + (Obligors * PD) / (Obligors + Obligors )
02 03 02 03
To be continued on Page 2
Continuation from Page 1
Using this method of pseudo- pool. In other words, you will portfolios to be able to esti-
pooling, banks can also com- get incorrect – say 5-year PDs, mate PDs with adequate gran-
pute transition probabilities if some obligors have been in ularity. E.g. 100 obligors in one
or cumulated multiyear PDs. the pool for five years and single rating grade will enable
For multiyear estimations, it is some for only four or three. PDs to be calculated as a mul-
crucial that the pool remains tiple of 1%, 200 obligors of
static or "frozen" with respect One limitation of this me- 0.5%, 1000 obligors of 0.1%
to the obligors in it, so that thod obviously lies in the size etc. The smaller the number of
the time period is equal for all of the pools. Most banks do obligors, the more volatile the
the obligors in the respective not have large enough credit PD estimation will be.
Another limitation is given if in time. A monthly estimation series and calculate credit risk
PDs are calculated once a year and comparison of PDs on a and expected losses on current
only (at year end), as changes year-to-year basis is therefore data.
in the PDs cannot be foreseen helpful to extend the time
Capital Requirement
Corporate portfolio – Rating PD old new difference
Effects of the removal of EL
from the risk weight function AA- 0,03% 1,18% 1,15% -0,03%
and the change in the
BBB 0,29% 4,38% 4,28% -0,10%
maturity adjustment
BB 1,07% 8,01% 7,56% -0,45%
LGD 45%
Maturity 2,5 years B 9,29% 19,27% 15,03% -4,24%