Rating Based Modeling of Credit Risk

Chapter 3. The New Basel Capital Accord

3.1. Overview

This chapter is dedicated to the new Basel Capital Accord with respect to rating based modeling, probabilities of default, and the required economic capital of financial institutions. Almost two decades have passed since the Basel Committee on Banking Supervision^[1] (the Committee) introduced its 1988 Capital Accord (the Accord). The major impetus for this Basel I Accord was the concern of the governors of the central banks that the capital—as a"cushion" against losses—of the world’s major banks had become dangerously low after persistent erosion through competition.

¹ The Basel Committee on Banking Supervision (BCBS) is a committee of central banks and bank supervisors from the major industrialized ...