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Basel II Correlation Values: An empirical analysis of EL, UL and the IRB Model

by Martin Hansen of Fitch Ratings,
Gary van Vuuren of Fitch Ratings,
Krishnan Ramadurai of Fitch Ratings, and
Mariarosa Verde of Fitch Ratings

May 19, 2008

Introduction: This report provides an empirical study of the Basel II asset value correlation assumptions for the internal ratings-based (IRB) approach. By statistically analyzing empirical loss data within the context of the IRB modeling framework, Fitch Ratings is able to derive correlation estimates across a range of asset types that are consistent with the long-run historical performance and risk profile of these assets. The methodology enables financial institutions analysts to assess the Basel II correlation assumptions and, in turn, IRB capital levels for particular portfolios.

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