Regulatory and internal model validation services from CompatibL
Default risk is the risk of direct loss due to an obligor’s default as well as the potential for indirect losses that may arise from a default event. DRC is calculated for Credit and Equity asset classes.
To calculate DRC:
- Banks must have a separate internal model to measure the default risk of trading book positions.
- Default risk must be measured using a VaR model.
- Banks must use a two-factor default simulation model with default correlations based on listed equity prices. Correlations must be based on a period of stress, estimated over a 10-year time horizon and be based on a one-year liquidity horizon.
- The VaR calculation must be done weekly and be based on a one-year time horizon one-tailed 99.9th percentile confidence level.