Confidence Crunch; Risk Magazine article

When I first started looking at economic capital, the convention was to calibrate the confidence level for the capital requirement to the probability of default associated with the target debt rating. This idea seemed pretty elegant on first examination and the same basic concept (excluding the target debt rating rationale) underpins the 99.9% confidence level employed in the formula for Internal Ratings Based risk weights adopted by the BCBS.

I wrote this article, published in Risk Magazine sometime in 2008 I think, where I set out the concerns I had with the idea.

“Confidence Crunch” published in Risk Magazine

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