On Partial Defaults in Portfolio Credit Risk: Comparing economic and regulatory view
by Rafael Weissbach of the University of Dortmund, and
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.
Keywords: Portfolio credit risk, non-performing exposure, recovery, Basel II.