Using Credit Risk Models for Regulatory Capital: Issues and Options

[...]The purpose of this article is to build on this earlier work, bythe Basel Committee and others, and to consider the issues thatwould have to be addressed in developing a regulatory minimumcapital standard based on banks’ internal credit risk models. Inconducting this exercise, we consider how such a capital regimemight be structured if the models were sufficiently advanced.This article is not intended to be a policy proposal, but rather toserve as a discussion laying out the issues that would have to beaddressed in creating a capital framework based on credit riskmodels. In particular, we draw on the structure of the IM capitalcharge for market risk and examine how this structure might beapplied in the credit risk setting.[...]