PT  - JOURNAL ARTICLE
AU  - Kilian Plank
TI  - Integration of Structured Finance Exposures in the<br/>Basel II Model: <em>Analytical Results</em>
AID  - 10.3905/jfi.2012.22.2.007
DP  - 2012 Sep 30
TA  - The Journal of Fixed Income
PG  - 7--18
VI  - 22
IP  - 2
4099  - https://pm-research.com/content/22/2/7.short
4100  - https://pm-research.com/content/22/2/7.full
AB  - For efficiency reasons or because of a lack of detailed data, financial institutions frequently treat structured finance securities similar to conventional fixed-income products such as bonds or loans, which are characterized by rating, correlation, and loss-given default. Structured finance securities, however, have a specific risk profile. They tend to concentrate losses in adverse states of the systematic risk factor. This fact implies that simply adopting risk parameters of conventional bonds or loans is an inappropriate technique.The author shows that, under the Basel II framework, tranches have to be modeled with an increased factor loading. They derive an analytical calibration procedure for the Basel II model that appropriately captures the risk profile of tranches. This finding not only allows for seamless integration of structured and conventional exposures in a portfolio model, but also offers insights into the concentration effects of tranches.TOPICS: Asset-backed securities (ABS), credit risk management, information providers/credit ratings