Murphy Choy

Importance of understanding the operational side of risk management

In Uncategorized on June 2, 2011 at 4:25 am

I was having an interesting discussion with some risk analysts about the impact of Basel II default definition on the credit default definition. One interesting observation is that the Basel II definition is extremely restrictive and does not help in many ways. I will have to agree that the Basel II definition does not seem to be very flexible for operation purposes.

One has to note that credit risk operations cannot be fully dependent on a single default definition. Because of the nature of financial products or more appropriately credit products, users will react differently to each product and thus the default patterns may not be consistent with the Basel II definition.

Under such scenario, one would expect to conduct some forms of analysis to determine the most optimal default definitions. There are many methodologies to establish the most optimal definition, we will touch on this in the next few blog posts.                                                                                                                                                                                                                                                                                                                                                                                              

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