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Why the conservative basel III portfolio credit risk model underestimates losses?

P. 69-78.

Basel II and III allow banks to use own default statistics when estimating regulatory parameters (risk-weights) for the capital adequacy ratio purpose. Bank inputs own risk estimates into the Vasicek model. It yields a distribution of credit losses. Regulator then requires a bank to take 99.9% quantile of such a distribution as a risk-measure (a risk-weight). When saying regulator we mean any Central Bank (including Bank of Russia, but no limited to it) that allow local banks to run the described approach. Having being criticized for excessive conservatism, we reveal that it still underestimates credit risk. This comes from the newly discovered fact that the default correlation may tend to co-depend with the systemic factor (for instance, with the GDP growth rate), albeit originally such co-dependence was not considered. We use the US statistics on total loans defaults for 1985-2019 to evidence the finding. The credit loss underestimation thus at least exceeds by 11% the loss estimates using the maximum (100%) correlation with the systemic factor. 

В книге

Под науч. редакцией: Alexander Shapoval, V. Popov, I. Makarov. Vol. 2795. CEUR Workshop Proceedings, 2020.