Applying Basel2 AIRB Model to CCAR Stress Testing

18 Pages Posted: 6 Nov 2013

See all articles by Steven H Zhu

Steven H Zhu

Brown University - Division of Applied Mathematics; Bank of America; Massachusetts Institute of Technology (MIT) - Sloan School of Management; Citibank, N.A. - Risk Management

Date Written: March 15, 2013

Abstract

The stressed probability of default and rating migration are important for the banks to assess the adequacy of credit reserve and credit capital under the stress market condition. Credit reserves are designed to cover the expected loss which can be estimated by the through-the-cycle probability of default, while the credit capital is designed to cover the unexpected loss which only occurs under downturn economy or extreme market condition. This paper describes a methodology of estimating the default and rating transitions across industry and regional segmentation that can be applied to wholesale credit portfolio for estimating the stressed losses and allowance for loss on loan and lease, under macro-economic scenarios such as prescribed in the Fed annual CCAR stress testing.

Keywords: PD, ALLL, CCAR, Stress Test, Credit Cycle, Risk Metrics, Basel2 AIRB

Suggested Citation

Zhu, Steven, Applying Basel2 AIRB Model to CCAR Stress Testing (March 15, 2013). Available at SSRN: https://ssrn.com/abstract=2349136 or http://dx.doi.org/10.2139/ssrn.2349136

Steven Zhu (Contact Author)

Brown University - Division of Applied Mathematics ( email )

Providence, RI 02912
United States

Bank of America ( email )

Bank of America Tower
One Bryant Park
New York, NY 10036
United States

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

Citibank, N.A. - Risk Management ( email )

New York, NY 11120
United States

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