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Creating and validating risk models [25]

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Bullet points include: Basel II calculates capital for credit exposures assuming a single risk factor driving a well-diversified book of loans/bonds taking the following form, where i,t is idiosyncratic: Correlation between underlying latent variables for two (different) exposures i and j is then: Capital formula, based on Unexpected Loss (i.e. MVaR minus expected loss), then (where M* is a maturity adjustment)

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