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Dimensions of credit risk and their relationship to economic capital requirements

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Author Info
Mark Carey
Abstract

Now in prospect is a major revision of international bank capital regulations that would embody recent advances in credit risk measurement and management. Previous regulations have been simpler in structure, with a primary goal of getting capital requirements right on average, and thus have largely ignored the difference between average and marginal. This paper presents evidence that explicit treatment in new regulations of several important dimensions of credit risk is necessary to limit banks' incentives to engage in capital arbitrage activities. Such activities, if unchecked, may lead to an increase in bank failure rates over time.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-18.

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Date of creation: 2000
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Handle: RePEc:fip:fedgfe:2000-18

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Related research
Keywords: Credit ; Risk management ; Bank capital;

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References listed on IDEAS
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.:
  1. Pamela Nickell & William Perraudin & Simone Varotto, . "Ratings versus equity-based credit risk modelling: an empirical analysis," Bank of England working papers 132, Bank of England. [Downloadable!]
  2. Altman, Edward I. & Suggitt, Heather J., 2000. "Default rates in the syndicated bank loan market: A mortality analysis," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 229-253, January. [Downloadable!] (restricted)
  3. 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.). [Downloadable!]
  4. Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, 08. [Downloadable!] (restricted)
  5. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 235-258, September. [Downloadable!] (restricted)
  6. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
  7. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January. [Downloadable!] (restricted)
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  8. Michael B. Gordy, 2000. "Credit VAR and risk-bucket capital rules: a reconciliation," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 406-417.
  9. Chunsheng Zhou, 1997. "Default correlation: an analytical result," Finance and Economics Discussion Series 1997-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Van Laere, Elisabeth & Baesens, Bart & Thibeault, André, 2008. "Bank capital: a myth resolved," Vlerick Leuven Gent Management School Working Paper Series 2007-35, Vlerick Leuven Gent Management School. [Downloadable!]
  2. Tor Jacobson & Jesper Lindé & Kasper Roszbach, 2005. "Credit Risk Versus Capital Requirements under Basel II: Are SME Loans and Retail Credit Really Different?," Journal of Financial Services Research, Springer, vol. 28(1), pages 43-75, October. [Downloadable!] (restricted)
    Other versions:
  3. Gutierrez Girault, Matias, 2006. "Non – parametric estimation of conditional and unconditional loan portfolio loss distributions with public credit registry data," MPRA Paper 9798, University Library of Munich, Germany, revised Jun 2007. [Downloadable!]
  4. Hughes Pirotte & Mathias Schmit & Céline Vaessen, 2004. "Credit Risk Mitigation Evidence in Auto Leases: LGD and Residual Value Risk," Working Papers CEB 04-008.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  5. Paola Dongili, 2005. "La definizione del prodotto delle banche," Working Papers 21, Università di Verona, Dipartimento di Scienze economiche. [Downloadable!]
  6. Powell, Andrew, 2002. "A capital accord for emerging economies?," Policy Research Working Paper Series 2808, The World Bank. [Downloadable!]
  7. Güttler, André & Raupach, Peter, 2008. "The impact of downward rating momentum on credit portfolio risk," Discussion Paper Series 2: Banking and Financial Studies 2008,16, Deutsche Bundesbank, Research Centre. [Downloadable!]
  8. Chakraborty, Suparna & Allen, Linda, 2007. "Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord," MPRA Paper 1805, University Library of Munich, Germany. [Downloadable!]
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