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Responding to the Eurozone Crisis - Applying the Shadow Rating Approach to Determine Economic Capital for Sovereign Exposures

Koskinen Rosemarin, Simon (2014) FMS820 20141
Mathematical Statistics
Abstract (Swedish)
The recent European sovereign-debt crisis has made it clear that exposures
towards sovereigns contain credit risk. However, according to the Basel framework's
standardized approach banks are not required to hold any regulatory capital
for highly rated sovereigns. In response, this thesis develops a shadow rating
approach model for sovereign probability of default estimation, subsequently
determining economic capital for sovereign exposures within a foundation internal
ratings-based framework. Furthermore, the empirical Bayes estimator is
utilized for low-default portfolio probability of default calibration. The model
is tested on ve homogeneous sub-segments in addition to the entire dataset
at hand. Empirical ndings suggest that... (More)
The recent European sovereign-debt crisis has made it clear that exposures
towards sovereigns contain credit risk. However, according to the Basel framework's
standardized approach banks are not required to hold any regulatory capital
for highly rated sovereigns. In response, this thesis develops a shadow rating
approach model for sovereign probability of default estimation, subsequently
determining economic capital for sovereign exposures within a foundation internal
ratings-based framework. Furthermore, the empirical Bayes estimator is
utilized for low-default portfolio probability of default calibration. The model
is tested on ve homogeneous sub-segments in addition to the entire dataset
at hand. Empirical ndings suggest that the full dataset performs adequately
overall. Nonetheless, model performance is superior for accurately constructed
sub-segments. In addition, economic, monetary and political indicators as well
as banking sector health are found to best replicate S&P's sovereign long-term
issuer credit ratings. (Less)
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author
Koskinen Rosemarin, Simon
supervisor
organization
course
FMS820 20141
year
type
H2 - Master's Degree (Two Years)
subject
language
English
id
4276200
date added to LUP
2014-01-29 11:26:16
date last changed
2014-01-29 11:26:16
@misc{4276200,
  abstract     = {The recent European sovereign-debt crisis has made it clear that exposures
towards sovereigns contain credit risk. However, according to the Basel framework's
standardized approach banks are not required to hold any regulatory capital
for highly rated sovereigns. In response, this thesis develops a shadow rating
approach model for sovereign probability of default estimation, subsequently
determining economic capital for sovereign exposures within a foundation internal
ratings-based framework. Furthermore, the empirical Bayes estimator is
utilized for low-default portfolio probability of default calibration. The model
is tested on ve homogeneous sub-segments in addition to the entire dataset
at hand. Empirical ndings suggest that the full dataset performs adequately
overall. Nonetheless, model performance is superior for accurately constructed
sub-segments. In addition, economic, monetary and political indicators as well
as banking sector health are found to best replicate S&P's sovereign long-term
issuer credit ratings.},
  author       = {Koskinen Rosemarin, Simon},
  language     = {eng},
  note         = {Student Paper},
  title        = {Responding to the Eurozone Crisis - Applying the Shadow Rating Approach to Determine Economic Capital for Sovereign Exposures},
  year         = {2014},
}