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Retail loans and Basel II: Using portfolio segmentation to reduce capital requirements

Author

Listed:
  • Kaltofen, Daniel
  • Paul, Stephan
  • Stein, Stefan

Abstract

This paper presents an innovative approach for grouping retail loans into homogeneous risk pools, which adheres to the provisions of the revised Basel II framework. The authors interpret Basel II using an efficient classification tree algorithm (recursive partitioning) and test it on a real data set of approximately 413,000 German auto loans. By classifying loans according to selective predictors of default, it is found that banks may achieve significant savings in terms of a lower regulatory capital requirement. Alternatively, this provides the opportunity to increase lending capacity.

Suggested Citation

  • Kaltofen, Daniel & Paul, Stephan & Stein, Stefan, 2007. "Retail loans and Basel II: Using portfolio segmentation to reduce capital requirements," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 1(1), pages 53-73, December.
    • Handle: RePEc:aza:rmfi00:y:2007:v:1:i:1:p:53-73
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    More about this item

    Keywords

    Basel II; retail portfolio; capital requirement; classification; CHAID;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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