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Reforming Capital Requirements in Emerging Countries: Calibrating Basel II using Historical Argentine Credit Bureau Data and CreditRisk+

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  • Verónica Balzarotti
  • Christian Castro
  • Andrew Powell

Abstract

Emerging economies are likely to be more volatile and asset risk more correlated than in industrialized countries. In this paper we discuss how credit scoring techniques and modern credit risk portfolio models can be used to measure credit risk and check Basel II calibration for such an environment. After reviewing the development of credit risk portfolio models, to explain our choice in using CreditRisk+, we discuss the definition and estimation methodology for a set of essential parameter inputs, which in turn depend on the data available - in this case from the Argentine public credit bureau. We then simulate, bank by bank, the introduction of Basel II's foundation IRB approach using the same data for Argentina and compare the results. We analyze how the IRB approach might be recalibrated and finally discuss a set of other issues regarding IRB implementation in an emerging economy.

Suggested Citation

  • Verónica Balzarotti & Christian Castro & Andrew Powell, 2004. "Reforming Capital Requirements in Emerging Countries: Calibrating Basel II using Historical Argentine Credit Bureau Data and CreditRisk+," Business School Working Papers capitalreqemerging, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpbsdt:capitalreqemerging
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    File URL: http://www.utdt.edu/departamentos/empresarial/cif/pdfs-wp/wpcif-072004.pdf
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    References listed on IDEAS

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    1. Veronica Balzarotti & Michael Falkenheim & Andrew Powell, 2002. "On the Use of Portfolio Risk Models and Capital Requirements in Emerging Markets: The Case of Argentina," The World Bank Economic Review, World Bank, vol. 16(2), pages 197-212, August.
    2. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January.
    3. Carey, Mark & Hrycay, Mark, 2001. "Parameterizing credit risk models with rating data," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 197-270, January.
    4. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
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    1. Powell, Andrew & Mylenko, Nataliya & Miller, Margaret & Majnoni, Giovanni, 2004. "Improving credit information, bank regulation, and supervision : on the role and design of public credit registries," Policy Research Working Paper Series 3443, The World Bank.
    2. Majnoni, Giovanni & Miller, Margaret & Powell, Andrew, 2004. "Bank capital and loan loss reserves under Basel II - implications for emerging countries," Policy Research Working Paper Series 3437, The World Bank.
    3. Kiguel, Miguel A. & Levy Yeyati, Eduardo & Galindo, Arturo & Panizza, Ugo & Miller, Margaret & Rojas-Suárez, Liliana & Bebczuk, Ricardo N. & López-de-Silanes, Florencio & Bernal, Olver & Auerbach, Pau, 2005. "Unlocking Credit: The Quest for Deep and Stable Bank Lending. Economic and Social Progress in Latin America. 2005 Report," IDB Publications (Books), Inter-American Development Bank, number 416, May.
    4. Cristina Betancour & José De Gregorio & Alejandro Jara, 2006. "Improving the banking system: the Chilean experience," BIS Papers chapters, in: Bank for International Settlements (ed.), The banking system in emerging economies: how much progress has been made?, volume 28, pages 163-80, Bank for International Settlements.
    5. Miguel A. Kiguel & Eduardo Levy Yeyati & Arturo Galindo & Ugo Panizza & Margaret Miller & Liliana Rojas-Suárez & Ricardo N. Bebczuk & Florencio López-de-Silanes & Olver Bernal & Paula Auerbach & Alber, 2005. "Unlocking Credit: The Quest for Deep and Stable Bank Lending," IDB Publications (Books), Inter-American Development Bank, number 79340, February.

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