Research Insight - Understanding Credit Charge Add-Ons in CreditManager - March 2014

Mar 7, 2014

Since the adoption of the Basel II standards, banks have been subject to minimum capital requirements based on the Internal-Ratings Based (IRB) formula, which is based on a simple credit portfolio model that accounts for some, but not all, possible sources of portfolio risk. To address the additional sources of risk, banks work with richer models and supervisors demand additional capital add-ons under "Pillar 2" of the BIS capital standards, which has created the need for a methodology to attribute capital to specific sources of risk. In this paper, we introduce a new attribution methodology and demonstrate the usage of a reporting framework available in CreditManager.