IDEAS home Printed from https://ideas.repec.org/a/ijc/ijcjou/y2013q3a2.html
   My bibliography  Save this article

Granularity Adjustment for Regulatory Capital Assessment

Author

Listed:
  • M. B. Gordy

    (Federal Reserve Board)

  • E. Lutkebohmert

    (University of Freiburg)

Abstract

The credit value-at-risk model underpinning the internal ratings-based approach of Basel II and III assumes that idiosyncratic risk has been fully diversified in the portfolio, so that economic capital depends only on systematic risk contributions. We propose a simple granularity adjustment (GA) for approximating the effect of undiversified idiosyncratic risk on required capital. To mitigate operational burden in implementation, we derive upper and lower bounds on the GA under incomplete information on the portfolio. We assess the magnitude and accuracy of the proposed GA on a set of bank portfolios drawn from the German credit register.

Suggested Citation

  • M. B. Gordy & E. Lutkebohmert, 2013. "Granularity Adjustment for Regulatory Capital Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 38-77, September.
  • Handle: RePEc:ijc:ijcjou:y:2013:q:3:a:2
    as

    Download full text from publisher

    File URL: http://www.ijcb.org/journal/ijcb13q3a2.pdf
    Download Restriction: no

    File URL: http://www.ijcb.org/journal/ijcb13q3a2.htm
    Download Restriction: no

    References listed on IDEAS

    as
    1. Gourieroux, C. & Laurent, J. P. & Scaillet, O., 2000. "Sensitivity analysis of Values at Risk," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 225-245, November.
    2. Patrick Gagliardini & Christian Gouriéroux, 2011. "Approximate Derivative Pricing for Large Classes of Homogeneous Assets with Systematic Risk," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 9(2), pages 237-280, Spring.
    3. Mikhail Voropaev, 2009. "Analytical Framework for Credit Portfolios. Part I: Systematic Risk," Papers 0911.0223, arXiv.org, revised Jul 2011.
    4. Gordy, Michael B. & Marrone, James, 2012. "Granularity adjustment for mark-to-market credit risk models," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1896-1910.
    5. Wolfgang Gerke & Ferdinand Mager & Timo Reinschmidt & Christian Schmieder, 2008. "Empirical Risk Analysis of Pension Insurance: The Case of Germany," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(3), pages 763-784.
    6. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
    7. Nikola Tarashev & Claudio Borio & Kostas Tsatsaronis, 2010. "Attributing systemic risk to individual institutions," BIS Working Papers 308, Bank for International Settlements.
    8. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
    9. Susanne Emmer & Dirk Tasche, 2003. "Calculating credit risk capital charges with the one-factor model," Papers cond-mat/0302402, arXiv.org, revised Jan 2005.
    10. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pierpaolo Grippa & Lucyna Gornicka, 2016. "Measuring Concentration Risk - A Partial Portfolio Approach," IMF Working Papers 16/158, International Monetary Fund.
    2. repec:spr:revint:v:12:y:2017:i:2:d:10.1007_s11558-017-9271-6 is not listed on IDEAS
    3. Caccioli, Fabio & Shrestha, Munik & Moore, Cristopher & Farmer, J. Doyne, 2014. "Stability analysis of financial contagion due to overlapping portfolios," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 233-245.
    4. Rainer Masera, 2014. "CRR/CRD IV: the trees and the forest," PSL Quarterly Review, Economia civile, vol. 67(271), pages 381-422.
    5. Neumann, Tobias, 2018. "Mortgages: estimating default correlation and forecasting default risk," Bank of England working papers 708, Bank of England.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2013:q:3:a:2. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bank for International Settlements). General contact details of provider: http://www.ijcb.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.