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Credit risk measurement and procyclicality

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  • Philip Lowe

    (Reserve Bank of Australia)

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    Abstract

    This paper examines the two-way linkages between credit risk measurement and the macroeconomy. It first discusses the issue of whether credit risk is low or high in economic booms. It then reviews how macroeconomic considerations are incorporated into credit risk models and the risk measurement approach that underlies the New Basel Capital Accord. Finally, it asks what effect these measurement approaches are likely to have on the macroeconomy, particularly through their role in influencing the level of bank capital. The paper argues that much remains to be done in integrating macroeconomic considerations into risk measurement, particularly during the upswing of business cycles that are characterised by rapid increases in credit and asset prices. It also suggests that a system of risk-based capital requirements is likely to deliver large changes in minimum requirements over the business cycle, particularly if risk measurement is based on market prices. This has the potential to increase the financial amplification of business cycles, although other aspects of risk-based capital requirements are likely to work in the other direction. Further work on evaluating the net effects is important for both supervisory and monetary authorities.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 116.

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    Length: 23 pages
    Date of creation: Sep 2002
    Date of revision:
    Handle: RePEc:bis:biswps:116

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    Related research

    Keywords: credit risk measurement; macroeconomy;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Gourinchas, Pierre-Olivier & Landerretche, Oscar & Vald├ęs, Rodrigo, 2001. "Lending Booms: Latin America and the World," CEPR Discussion Papers 2811, C.E.P.R. Discussion Papers.
    2. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
    3. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
    4. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
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