Chapter 4. Rating Based Modeling

In the previous chapters we gave a brief overview of the ideas and application of the rating processes to credit risk and how ratings and estimates of PDs are incorporated into the new Basel Capital Accord. In reduced form or rating based models, ratings are the decision variable as it comes to determining the loss distribution of portfolios or the credit VaR. The popularity of these models comes from the straightforwardness of the approach but is also a consequence of the upcoming new Capital Accord of the Basel Committee on Banking Supervision (2001) that was described in the previous chapter.

Despite some deficiencies of the current credit rating structure and the fact that rating agencies failed to provide ...

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