An Assessment of the Internal Rating Based Approach in Basel II
AbstractThe new bank capital regulation commonly known as Basel II includes a internal rating based approach (IRB) to measuring credit risk in bank portfolios. The IRB relies on the assumptions that the portfolio is fully diversified and that systematic risk is driven by one common factor. In this work we empirically investigate the impact of these assumptions by comparing the risk measures produced by the IRB with those of a more general credit risk model that allows for multiple systematic risk factors and portfolio concentration. Our tests conducted on a large sample of eurobonds over a ten year period reveal that deviations between the IRB and the general model can be substantial.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2008-04.
Length: 29 pages
Date of creation: Aug 2008
Date of revision:
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Basel II; Internal Rating Based Approach; Credit Rating; Credit Risk;
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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