Best Practices For BIS II Implementation
Credit risk is the risk that a counterparty will fail to meet his payment obligation, resulting in a loss. This risk is historically considered the main risk for banks. Under BIS II a bank should asses its credit risk and retain capital for it.
In this section the methods available for assessing credit risk are explained. These are:
The main risk factors which need to be modelled in the Internal Rating Based approach (IRB) are the PD, LGD and EAD. How these factors work together to determine the credit risk is explained in the Internal Rating Based approach (IRB) chapter. How these factors can be modelled is discussed separately in the PD, LGD and EAD chapters.