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Hypothesis Test of Default Correlation and Application to Specific Risk
Oct 1, 2000
The bank may use its internal model to calculate specific risk if it can demonstrate the model sufficiently captures specific risk. The capital rules also stipulate that the model should explain the historical price variation in the portfolio and capture potential concentrations, including magnitude and changes in composition. Finally, the model should be sufficiently robust to capture greater volatility due to adverse market conditions. If the bank's internal model cannot meet these requirements, the bank must use the standardized approach to measuring specific risk under the capital rules.
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