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Using credit risk models for regulatory capital: issues and options

  • Beverly J. Hirtle
  • Mark Levonian
  • Marc Saidenberg
  • Stefan Walter
  • David Wright

The authors describe the issues and options that would be associated with the development of regulatory minimum capital standards for credit risk based on banks' internal risk measurement models. Their goal is to provide a sense of the features that an internal-models (IM) approach to regulatory capital would likely incorporate, and to stimulate discussion among financial institutions, supervisors, and other interested parties about the many practical and conceptual issues involved in structuring a workable IM regulatory capital regime for credit risk. The authors focus on three main areas: prudential standards defining the risk estimate to be used in the capital requirements, model standards describing the essential components of a comprehensive credit risk model, and validation techniques that could be used by supervisors and banks to assess model accuracy. The discussion highlights a range of alternatives for each of these areas.

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Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2001)
Issue (Month): Mar ()
Pages: 19-36

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Handle: RePEc:fip:fednep:y:2001:i:mar:p:19-36:n:v.7no.1
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  1. 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.).
  2. Darryll Hendricks & Beverly Hirtle, 1997. "Bank capital requirements for market risk: the internal models approach," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-12.
  3. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  4. Jose A. Lopez & Marc R. Saidenberg, 1999. "Evaluating credit risk models," Working Papers in Applied Economic Theory 99-06, Federal Reserve Bank of San Francisco.
  5. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  6. Arturo Estrella, 1995. "A prolegomenon to future capital requirements," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-12.
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