{"title":"Eurozone Sovereign Default Risk and Capital: A Bayesian Approach","authors":"Rainer Jobst, Daniel Rösch","doi":"10.3905/jfi.2021.1.124","DOIUrl":null,"url":null,"abstract":"Using a Bayesian generalized linear mixed model (GLMM), we analyze Eurozone sovereign real-world default probabilities and correlations, and compare regulatory and economic capital requirements. The approach combines prior information and sparse sovereign historical default data. One main finding is that capital under the Basel internal ratings based approach (IRBA) is higher than under the standardized approach (SA) by a factor of 2.06 to 8.86, depending on the method for estimating the probability of default. This divergence is driven mainly by zero capital charges for highly rated securities under the SA. Furthermore, under the Bayesian model, Basel IRBA capital is roughly equivalent to economic capital using the expected shortfall at a 99% confidence level. The results suggest that the zero risk weights under the SA are not consistent with economic risk and offer opportunities for regulatory arbitrage.","PeriodicalId":53711,"journal":{"name":"Journal of Fixed Income","volume":"31 1","pages":"41 - 65"},"PeriodicalIF":0.0000,"publicationDate":"2021-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"5","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Fixed Income","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.3905/jfi.2021.1.124","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 5
Abstract
Using a Bayesian generalized linear mixed model (GLMM), we analyze Eurozone sovereign real-world default probabilities and correlations, and compare regulatory and economic capital requirements. The approach combines prior information and sparse sovereign historical default data. One main finding is that capital under the Basel internal ratings based approach (IRBA) is higher than under the standardized approach (SA) by a factor of 2.06 to 8.86, depending on the method for estimating the probability of default. This divergence is driven mainly by zero capital charges for highly rated securities under the SA. Furthermore, under the Bayesian model, Basel IRBA capital is roughly equivalent to economic capital using the expected shortfall at a 99% confidence level. The results suggest that the zero risk weights under the SA are not consistent with economic risk and offer opportunities for regulatory arbitrage.
期刊介绍:
The Journal of Fixed Income (JFI) provides sophisticated analytical research and case studies on bond instruments of all types – investment grade, high-yield, municipals, ABSs and MBSs, and structured products like CDOs and credit derivatives. Industry experts offer detailed models and analysis on fixed income structuring, performance tracking, and risk management. JFI keeps you on the front line of fixed income practices by: •Staying current on the cutting edge of fixed income markets •Managing your bond portfolios more efficiently •Evaluating interest rate strategies and manage interest rate risk •Gaining insights into the risk profile of structured products.