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Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macro Economy

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Author Info

  • Carling, Kenneth

    (Högskolan Dalarna, Borlänge)

  • Jacobson, Tor

    ()
    (Research Department, Central Bank of Sweden)

  • Lindé, Jesper

    ()
    (Research Department, Central Bank of Sweden)

  • Roszbach, Kasper

    ()
    (Research Department, Central Bank of Sweden)

Abstract

The Internal Ratings Based (IRB) approach for capital determination is one of the cornerstones in the proposed revision of the Basel Committee rules for bank regulation. We evaluate the IRB approach using historical business loan portfolio data from a major Swedish bank for the period 1994 to 2000. First, we estimate a duration model that takes into account both company, loan related and macroeconomic variables. Next, we obtain a Value-at-Risktype (VaR) credit risk measure, by model-based simulations. Moreover, we study how both the bank’s credit risk and bu.er capital changes over time (had the bank been subject to the proposed rules). This approach allows us to (i) make individual forecasts of default risk conditional on company, loan and macro variables, (ii) study portfolio credit risk over time, (iii) assess to what extent the new Accord will achieve its main objective of increasing credit risk sensitivity in minimal capital charges, and (iv) compare current capital requirements to those under the proposed system. Our results show that macro conditions have great explanatory power in predicting default risk and calculating credit risk. The IRB approach, although sensitive to the choice of some horizon parameters, is an achievement in the intended direction.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 142.

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Length: 49 pages
Date of creation: 01 Sep 2002
Date of revision:
Publication status: Forthcoming in Journal of Banking and Finance.
Handle: RePEc:hhs:rbnkwp:0142

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Related research

Keywords: Internal Ratings Based approach; relative risk weights; Value-at-Risk; credit risk models;

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References

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  1. Hamerle, Alfred & Liebig, Thilo & Rösch, Daniel, 2003. "Credit Risk Factor Modeling and the Basel II IRB Approach," Discussion Paper Series 2: Banking and Financial Studies 2003,02, Deutsche Bundesbank, Research Centre.
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  10. Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, 08.
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Citations

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Cited by:
  1. Carling , Kenneth & Lundberg, Sofia, 2002. "Bank Lending, Geographical Distance, and Credit risk: An Empirical Assessment of the Church Tower Principle," Working Paper Series 144, Sveriges Riksbank (Central Bank of Sweden).
  2. Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2006. "Internal ratings systems, implied credit risk and the consistency of banks' risk classification policies," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1899-1926, July.
  3. 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.
  4. Claudio Borio & Haibin Zhu, 2008. "Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?," BIS Working Papers 268, Bank for International Settlements.
  5. Carling, Kenneth & Lundberg, Sofia, 2005. "Asymmetric information and distance: an empirical assessment of geographical credit rationing," Journal of Economics and Business, Elsevier, vol. 57(1), pages 39-59.
  6. Dietske Simons & Ferdinand Rolwes, 2009. "Macroeconomic efault Modeling and Stress Testing," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 177-204, September.
  7. Claudia Miani & Giulio Nicoletti & Alessandro Notarpietro & Massimiliano Pisani, 2012. "Banks’ balance sheets and the macroeconomy in the Bank of Italy Quarterly Model," Questioni di Economia e Finanza (Occasional Papers) 135, Bank of Italy, Economic Research and International Relations Area.
  8. Ines Drumond, 2009. "Bank Capital Requirements, Business Cycle Fluctuations And The Basel Accords: A Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 798-830, December.
  9. Mark Illing & Graydon Paulin, 2004. "The New Basel Capital Accord and the Cyclical Behaviour of Bank Capital," Working Papers 04-30, Bank of Canada.
  10. Koopman, Siem Jan & Kräussl, Roman & Lucas, André & Monteiro, André B., 2009. "Credit cycles and macro fundamentals," Journal of Empirical Finance, Elsevier, vol. 16(1), pages 42-54, January.

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