Designing a Self-Assessment for Basel II Credit Risk Models

The new Basel II Capital Accord stimulates banks to calculate their regulatory capital with more advanced and risk sensitive approaches. For credit risk, ING has opted for the Advanced Internal Rating Based (AIRB) approach for calculating the required amount of regulatory capital. This approach uses 3 types of models (PD, LGD, EAD) that are to be estimated by internally developed models. Formal approval of the Dutch Central Bank (DNB) is required to use the AIRB approach in calculating the required regulatory capital. In order to get approval, the bank must perform an overall Self-Assessment of their Risk Models; however it not exactly prescribed how this should be done. The goal of this thesis is to design a Self-Assessment of the Advanced Internal Rating Based (AIRB) approach for ING on a consolidated basis. The thesis limits itself to the Basel II pillar I credit risk models (PD, LGD, EAD). And concentrate itself only to the portfolio exposure categories: (a) Central Governments & Central Banks, (b) Institutions, (c) Corporates and (d) Retail.