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Analysing revisions to the standardised approach in credit risk. Evidence from sovereigns

Author

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  • Lukasz Prorokowski

    (H.L. Prorokowski LLC)

Abstract

In December 2015, the Basel Committee on Banking Supervision issued an updated consultative paper that proposes new standards for the standardised treatment of credit risk exposures in the banking book. Reviewing the proposed changes to calculating risk weights, this paper advises on areas that require further improvements from regulators and policymakers, and immediate attention from practitioners. The paper empirically tests for a trade-off between various methodologies of calculating risk weights for sovereign exposures under the standardised approach for credit risk. In doing so, the paper highlights large discrepancies in the risk-weighted capital caused by choosing different calculation methods prescribed by the revised standards. The paper concludes that the standards for the standardised treatment of credit risk require further amendments to address the issues revolving around different capital levels for the same exposure.

Suggested Citation

  • Lukasz Prorokowski, 2017. "Analysing revisions to the standardised approach in credit risk. Evidence from sovereigns," Bank i Kredyt, Narodowy Bank Polski, vol. 48(3), pages 235-262.
    • Handle: RePEc:nbp:nbpbik:v:48:y:2017:i:3:p:235-262
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    File URL: https://bankikredyt.nbp.pl/content/2017/03/BIK_03_2017_01Prorokowski.pdf
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    References listed on IDEAS

    as
    1. Francesco Vallascas & Jens Hagendorff, 2013. "The Risk Sensitivity of Capital Requirements: Evidence from an International Sample of Large Banks," Review of Finance, European Finance Association, vol. 17(6), pages 1947-1988.
    2. Van Roy, Patrick, 2005. "Credit ratings and the standardised approach to credit risk in Basel II," Working Paper Series 517, European Central Bank.
    3. Ms. Sofiya Avramova & Mrs. Vanessa Le Lesle, 2012. "Revisiting Risk-Weighted Assets," IMF Working Papers 2012/090, International Monetary Fund.
    4. Lukasz Prorokowski & Hubert Prorokowski, 2014. "Comprehensive risk measure – current challenges," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 22(3), pages 271-284, July.
    5. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Jan Nokkala, 2022. "Are large credit exposures a source of concentration risk?," Bank i Kredyt, Narodowy Bank Polski, vol. 53(4), pages 375-398.

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    More about this item

    Keywords

    standardised approach; credit risk; sovereign exposures; risk weights; capital charge;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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