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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2003/09.
Date of creation: Dec 2003
Date of revision:
Contact details of provider:
Postal: Na Prikope 28, 115 03 Prague 1
Phone: 00420 2 2442 1111
Fax: 00420 2 2421 8522
Web page: http://www.cnb.cz/en/research/research_intro/
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)
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.:
- Joshua Rosenberg & Robert F. Engle, 2000.
"Empirical Pricing Kernels,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
99-014, New York University, Leonard N. Stern School of Business-.
- Ait-Sahalia, Yacine & Lo, Andrew W., 2000.
"Nonparametric risk management and implied risk aversion,"
Journal of Econometrics,
Elsevier, vol. 94(1-2), pages 9-51.
- Yacine Ait-Sahalia & Andrew W. Lo, 2000. "Nonparametric Risk Management and Implied Risk Aversion," NBER Working Papers 6130, National Bureau of Economic Research, Inc.
- Dilip Madan & Haluk Unal, 1999. "A Two-Factor Hazard-Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads," Center for Financial Institutions Working Papers 99-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
- Barnhill Jr., Theodore M. & Maxwell, William F., 2002. "Modeling correlated market and credit risk in fixed income portfolios," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 347-374, March.
- Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
- Jackwerth, Jens Carsten, 2000.
"Recovering Risk Aversion from Option Prices and Realized Returns,"
Review of Financial Studies,
Society for Financial Studies, vol. 13(2), pages 433-51.
- Jens Carsten Jackwerth., 1996. "Recovering Risk Aversion from Option Prices and Realized Returns," Research Program in Finance Working Papers RPF-265, University of California at Berkeley.
- Jens Carsten Jackwerth, 1998. "Recovering Risk Aversion from Option Prices and Realized Returns," Finance 9803002, EconWPA.
- Alexis Derviz & Narcisa Kadlcáková, 2005. "Business cycle, credit risk and economic capital determination by commercial banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 299-327 Bank for International Settlements.
- Van Roy, Patrick, 2005.
"Credit ratings and the standardised approach to credit risk in Basel II,"
Working Paper Series
0517, European Central Bank.
- Patrick Van Roy, 2005. "Credit ratings and the standardised approach to credit risk in Basel II," Finance 0509014, EconWPA.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Babecky).
If references are entirely missing, you can add them using this form.