On Partial Defaults in Portfolio Credit Risk: Comparing economic and regulatory view

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On Partial Defaults in Portfolio Credit Risk: Comparing economic and regulatory view

by Rafael Weissbach of the University of Dortmund, and
Carsten von Lieres und Wilkau of WestLB AG

December 23, 2005

Abstract: Most credit portfolio models calculate the loss distribution of a portfolio consisting solely of performing counterparts. We develop two models that account for defaulted counterparts in the calculation of the economic capital. First, we model the portfolio of non-performing counterparts stand-alone. The second approach derives the integrated loss distribution for the non-performing and the performing portfolio. Both calculations are supplemented by formulae for contributions of the single counterpart to the economic capital. Calibrating the models allows for an impact study and a comparison with Basel II.

JEL Classification: C51 G11, G18, G33.

Keywords: Portfolio credit risk, non-performing exposure, recovery, Basel II.

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