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Using credit risk models for regulatory capital: issues and options

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  • Beverly J. Hirtle
  • Mark Levonian
  • Marc Saidenberg
  • Stefan Walter
  • David Wright

Abstract

The authors describe the issues and options that would be associated with the development of regulatory minimum capital standards for credit risk based on banks' internal risk measurement models. Their goal is to provide a sense of the features that an internal-models (IM) approach to regulatory capital would likely incorporate, and to stimulate discussion among financial institutions, supervisors, and other interested parties about the many practical and conceptual issues involved in structuring a workable IM regulatory capital regime for credit risk. The authors focus on three main areas: prudential standards defining the risk estimate to be used in the capital requirements, model standards describing the essential components of a comprehensive credit risk model, and validation techniques that could be used by supervisors and banks to assess model accuracy. The discussion highlights a range of alternatives for each of these areas.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2001)
Issue (Month): Mar ()
Pages: 19-36

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Handle: RePEc:fip:fednep:y:2001:i:mar:p:19-36:n:v.7no.1

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Related research

Keywords: Bank capital ; Bank loans ; Risk ; Bank supervision;

References

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  1. Arturo Estrella, 1995. "A prolegomenon to future capital requirements," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-12.
  2. Lopez, Jose A. & Saidenberg, Marc R., 2000. "Evaluating credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 151-165, January.
  3. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  4. Michael B. Gordy, 1998. "A comparative anatomy of credit risk models," Finance and Economics Discussion Series 1998-47, Board of Governors of the Federal Reserve System (U.S.).
  5. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  6. Darryll Hendricks & Beverly Hirtle, 1997. "Bank capital requirements for market risk: the internal models approach," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-12.
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Citations

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Cited by:
  1. Lopez, Jose A., 2004. "The empirical relationship between average asset correlation, firm probability of default, and asset size," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 265-283, April.
  2. Skander J. Van den Heuvel, 2002. "Does bank capital matter for monetary transmission?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 259-265.
  3. Maximilian J.B. Hall, 2001. "The basle Committee's proposals for a new capital adequacy assessment framework: a critique," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(217), pages 111-179.
  4. Allen, Linda & DeLong, Gayle & Saunders, Anthony, 2004. "Issues in the credit risk modeling of retail markets," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 727-752, April.
  5. Hayette Gatfaoui, 2003. "Risque de Défaut et Risque de Liquidité : Une Etude de Deux Composantes du Spread de Crédit," Risk and Insurance 0308005, EconWPA.

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