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An Assessment of Basel II Procyclicality in Mortgage Portfolios

  • Jesús Saurina

    ()

  • Carlos Trucharte

    ()

In this paper we develop a probability of default (PD) model for mortgage loans, taking advantage of the Spanish Credit Register, a comprehensive database on loan characteristics and credit quality. From that model, we calculate different types of PDs: point in time, PIT, through the cycle, TTC, average across the cycle and acyclical. Then, we compare capital requirements coming from the different Basel II approaches. We show that minimum regulatory capital under Basel II can be very sensitive to the risk measurement methodology employed. Thus, the procyclicality of regulatory capital requirements under Basel II is an open question, depending on the way internal rating systems are implemented and their output is utilised. We focus on the mortgage portfolio since it is one of the most under researched areas regarding the impact of Basel II and because it is one of the most important banks’ portfolios.

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File URL: http://hdl.handle.net/10.1007/s10693-007-0008-1
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Article provided by Springer & Western Finance Association in its journal Journal of Financial Services Research.

Volume (Year): 32 (2007)
Issue (Month): 1 (October)
Pages: 81-101

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Handle: RePEc:kap:jfsres:v:32:y:2007:i:1:p:81-101
DOI: 10.1007/s10693-007-0008-1
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Web page: http://westernfinance.org/

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  20. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
  21. Calem, Paul S. & LaCour-Little, Michael, 2004. "Risk-based capital requirements for mortgage loans," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 647-672, March.
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  24. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
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