Credit Risk, Systemic Uncertainties and Economic Capital Requirements for an Artificial Bank Loan Portfolio
AbstractThis paper analyses the impact of different credit risk-based capital requirement implementations on banks' need for capital. The capital requirements for an artificially constructed risky loan portfolio are calculated by applying the BIS approach, the two widespread commercial risk-measurement models, CreditMetrics and CreditRisk+, and, finally, an original synthetic model similar to KMV. In the first three cases we closely follow the methodologies proposed by the regulatory or credit risk models. Economic capital requirements for the latter are obtained by means of Monte Carlo simulations. In the context of CreditMetrics, we additionally perform a Monte Carlo-based stress testing of the monetary policy changes reflected in the term structure of interest rates. Our model of KMV type combines the elements of the structural and the reduced-form methods of risky debt pricing, and the possibilities of its numerical solution are outlined.
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Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2003/09.
Date of creation: Dec 2003
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More information through EDIRC
credit risk; economic capital; market risk; New Basel Capital Accord; systemic uncertainty.;
Find related papers by 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
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-CMP-2005-04-16 (Computational Economics)
- NEP-FIN-2005-04-16 (Finance)
- NEP-TRA-2005-04-16 (Transition Economics)
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