History of the World Largest Credit Risk Losses in 1972–2018

Abstract

We study the world largest credit risk losses from the year of 1972. We expect that such events drove the credit risk regulation development by the Basel Committee on Banking Supervision, including that of the Internal Ratings-Based (IRB) one of the Basel II Accord. By choosing a round threshold of current USD 100m equivalent of loss amount and the entity total assets in excess of current USD 500m as ofthe loss announcement date, we collected the dataset of 56 cases with the total credit loss of the current USD 700bn (or ca. 900 constant 2018 USD bn) which occurred during the last half of a century. We provide granular description of the stylized facts that characterize five typical credit risk evolution scenarios. The two most unexpected findings are as follows. First, we verified the announced loss amounts by analysis of stock quotes dynamics around the loss announcement dates. Thus we were able to trace three cases where announced by mass media losses may seem to have been exaggerated. Second, there is a series of events when there was a disclosure combination of credit risk loss and operational one. It is likely that the latter might have been used to partially cover the former.