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EU Sovereign Default Risk and Capital - A Bayesian Approach

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Discipline Group 
Research Seminars in Finance
 
Topic: EU Sovereign Default Risk and Capital - A Bayesian Approach
 
SpeakerDaniel Roesch, University of Regensburg
 
Abstract:      
We analyze EU sovereign real-world default probabilities and correlations using a Bayesian GLMM and compare regulatory and economic capital requirements. The main findings are, first, that the posterior distribution of sovereign correlation yields much higher values than for corporates. Second,depending on the method for estimating the probability of default, capital under the Basel Internal Ratings Based Approach (IRBA) is by a factor between 2.7 and 9.5 higher than under the Standardized Approach (SA). This divergence is mainly driven by zero capital charges for highly rated securities under the SA. Third, under the Bayesian model, Basel IRBA capital is roughly equivalent to economic capital using the Expected Shortfall at a 97.5% 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.
 
A light lunch will be provided at 1p.m. Please RSVP for catering purposes to Mala Kapahi by 12 noon on Monday 20th February.
 
Date: Wednesday, 22nd February 2017      
Time: 12.00 – 1.00 p.m.
Venue: University of Technology, Sydney
             Building 8, Level 3, Room 03.04
             Dr Chau Chak Wing Building
             14 - 28 Ultimo Road, Ultimo
 
Co-ordinator: Adrian Lee (Ph: +61 2 9514 7765)
 
Enquiries: Mala Kapahi (Ph: +61 2 9514 7777)

When

22 February 2017
12:00 pm - 1:00 pm

Where

City - HaymarketCB08 Dr Chau Chak Wing Building, Building 8