Economic and regulatory capital allocation for revolving retail exposures
The latest revision of the Internal Ratings Based approach of the Basel Committee on Banking Supervision's New Capital Accord Proposal for retail portfolios contains a significant innovation relative to previous versions: the recognition that, for revolving credits, future margin income will be available to cover losses before a bank's capital is threatened. We assemble a mini-portfolio of revolving exposures and we compare the capital charges generated by the latest Basel's formula with the capital charges generated by two possible earnings-at-risk internal capital allocation models. We find that in general, Basel's capital ratios are closer to those generated by our models for the groups with lower credit risk. We attribute the discrepancies to the different ways Basel and our models account for future margin income, to Basel assumptions about asset correlations, and to one our models taking macroeconomic conditions explicitly into account.
|Date of creation:||2003|
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- Michael B. Gordy, 2002.
"A risk-factor model foundation for ratings-based bank capital rules,"
Finance and Economics Discussion Series
2002-55, Board of Governors of the Federal Reserve System (U.S.).
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