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Retail credit capital charge optimisation and the new Basel Accord

Author

Listed:
  • Botha, Marius
  • Van Vuuren, Gary

Abstract

The Basel Committee for Banking Supervision's new Basel Accord and accompanying credit risk capital equations are designed to encourage the improvement of risk management practices. However, over a range of loan quality for some loan types, improvement of risk management practices by enhanced borrower discrimination leads to increased regulatory capital charges. The effect — entirely due to underlying mathematics — could discourage banks from improving risk management for such loans, thereby contravening the Committee's aims. This paper locates and investigates the source of the problem and illustrates its effect on regulatory capital.

Suggested Citation

  • Botha, Marius & Van Vuuren, Gary, 2009. "Retail credit capital charge optimisation and the new Basel Accord," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 2(3), pages 265-283, June.
    • Handle: RePEc:aza:rmfi00:y:2009:v:2:i:3:p:265-283
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    More about this item

    Keywords

    Basel II; probability of default; credit risk; capital requirements;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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