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Implementing Basel II in Retail Banking: A simple statistical approach

by Alexandre Adam of BNP Paribas,
Antoine Chouillou of BNP Paribas, and
Olivier Scaillet of HEC Genève & FAME

September 16, 2005

Abstract: This paper provides an integrated framework for credit risk measurement and aggregation in retail banking. Tractable statistical estimation is proposed under a linear formulation with correlated residuals. Our model extends the Basel II framework, and can be accurately adapted for regulatory risk component estimation in compliance with regulatory guidelines. Practical tests on real portfolios illustrate the relevance of our general setup. The output of the estimation procedure can also be exploited for procyclicality assessment, stress testing and aggregation with corporate portfolios.

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