Basel Rating

In: Business and Management

Submitted By sigma76
Words 2549
Pages 11
About Ratings & Segments on IRB Approach
João Pires da Cruz1

The Basel Committee on Banking Supervision, on the process of definition of the New Capital Accord, establishes a stepwise framework for regulatory capital allocation for credit risk, starting on what is designated as Standard Approach, in which banks must allocate capital according to regulatory rules, and finishing on what is designated as the Advanced IRB Approach, in which banks must allocate capital based on their own risk evaluation and on the committee guidelines for that evaluation. The committee defines several guidelines for the IRB Approach depending on the type of credit exposure but, technically, we can group the several lines of attach into two ways of deal with the credit portfolio, the rating approach, for the major exposures like banks, sovereigns and corporate; and the segmentation approach for retail and small business exposures. The most accepted credit risk frameworks are rating based models since, historically, the aim of the models was the bond market, the market of debt securities issued by stable corporations, banks and states. In this market, the assumption that a debt security is less risky than other debt security become the essence of the market, since debt issuers need to disclose information to lower the price of the debt security, affected by a risk premium over the interest rate. And the disclosed information includes rating agencies evaluations of financial figures, operational processes, company market risks, costumer risks, etc…. A bond issuer to be ratted at a high grade must be completely ‘undressed’ and accompanied by a rating agency and, with a very good probability, the rating agency evaluation is valid for the time horizon of the risk model and the rating criteria are well known by all intervenient – market, issuer and agency. In these conditions…...

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