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Assessing the Basel II Internal Ratings-Based Approach: Empirical Evidence from Australia

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  • Silvio Tarca
  • Marek Rutkowski

Abstract

The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk implements an asymptotic single risk factor (ASRF) model. Measurements from the ASRF model of the prevailing state of Australia's economy and the level of capitalisation of its banking sector find general agreement with macroeconomic indicators, financial statistics and external credit ratings. However, given the range of economic conditions, from mild contraction to moderate expansion, experienced in Australia since the implementation of Basel II, we cannot attest to the validity of the model specification of the IRB approach for its intended purpose of solvency assessment. With the implementation of Basel II preceding the time when the effect of the financial crisis of 2007-09 was most acutely felt, our empirical findings offer a fundamental assessment of the impact of the crisis on the Australian banking sector. Access to internal bank data collected by the prudential regulator distinguishes our research from other empirical studies on the IRB approach and recent crisis.

Suggested Citation

  • Silvio Tarca & Marek Rutkowski, 2014. "Assessing the Basel II Internal Ratings-Based Approach: Empirical Evidence from Australia," Papers 1412.0064, arXiv.org, revised Jul 2016.
    • Handle: RePEc:arx:papers:1412.0064
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    1. Lütkebohmert, Eva & Gordy, Michael B., 2007. "Granularity adjustment for Basel II," Discussion Paper Series 2: Banking and Financial Studies 2007,01, Deutsche Bundesbank.
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    5. James Bishop & Christopher Kent & Michael Plumb & Vanessa Rayner, 2013. "The Resources Boom and the Australian Economy: A Sectoral Analysis," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 39-50, March.
    6. Tony McDonald & Steven Morling, 2011. "The Australian economy and the global downturn, Part 1: Reasons for resilience," Economic Roundup, The Treasury, Australian Government, issue 2, pages 1-31, September.
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    Cited by:

    1. Marek Rutkowski & Silvio Tarca, 2014. "Regulatory Capital Modelling for Credit Risk," Papers 1412.1183, arXiv.org, revised Jul 2016.

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