Systematic Credit Cycle Risk of Financial Collaterals: Modelling and Evidence

According to the new capital adequacy framework (Basel II) finally adopted by the BaselCommittee in June 2004 the eligibility of collaterals, especially financial collaterals, is extended incomparison to the existing rules. However, financial assets are valued conservatively in the creditcontext which suggests a strong correlation between collaterals and credit default rates. This paperdiscusses the impact of the dependency of financial collaterals...