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Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macro Economy

Author

Listed:
  • Carling, Kenneth

    (Högskolan Dalarna, Borlänge)

  • Jacobson, Tor

    () (Research Department, Central Bank of Sweden)

  • Lindé, Jesper

    () (Research Department, Central Bank of Sweden)

  • Roszbach, Kasper

    () (Research Department, Central Bank of Sweden)

Abstract

The Internal Ratings Based (IRB) approach for capital determination is one of the cornerstones in the proposed revision of the Basel Committee rules for bank regulation. We evaluate the IRB approach using historical business loan portfolio data from a major Swedish bank for the period 1994 to 2000. First, we estimate a duration model that takes into account both company, loan related and macroeconomic variables. Next, we obtain a Value-at-Risktype (VaR) credit risk measure, by model-based simulations. Moreover, we study how both the bank’s credit risk and bu.er capital changes over time (had the bank been subject to the proposed rules). This approach allows us to (i) make individual forecasts of default risk conditional on company, loan and macro variables, (ii) study portfolio credit risk over time, (iii) assess to what extent the new Accord will achieve its main objective of increasing credit risk sensitivity in minimal capital charges, and (iv) compare current capital requirements to those under the proposed system. Our results show that macro conditions have great explanatory power in predicting default risk and calculating credit risk. The IRB approach, although sensitive to the choice of some horizon parameters, is an achievement in the intended direction.

Suggested Citation

  • Carling, Kenneth & Jacobson, Tor & Lindé, Jesper & Roszbach, Kasper, 2002. "Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macro Economy," Working Paper Series 142, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0142
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Koopman, Siem Jan & Lucas, Andre & Monteiro, Andre, 2008. "The multi-state latent factor intensity model for credit rating transitions," Journal of Econometrics, Elsevier, vol. 142(1), pages 399-424, January.
    2. Bonfim, Diana, 2009. "Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 281-299, February.
    3. Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2006. "Internal ratings systems, implied credit risk and the consistency of banks' risk classification policies," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1899-1926, July.
    4. Markus Behn & Rainer Haselmann & Paul Wachtel, 2016. "Procyclical Capital Regulation and Lending," Journal of Finance, American Finance Association, vol. 71(2), pages 919-956, April.
    5. Mark Illing & Graydon Paulin, 2004. "The New Basel Capital Accord and the Cyclical Behaviour of Bank Capital," Staff Working Papers 04-30, Bank of Canada.
    6. Carling, Kenneth & Lundberg, Sofia, 2005. "Asymmetric information and distance: an empirical assessment of geographical credit rationing," Journal of Economics and Business, Elsevier, vol. 57(1), pages 39-59.
    7. Dietske Simons & Ferdinand Rolwes, 2009. "Macroeconomic efault Modeling and Stress Testing," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 177-204, September.
    8. Claudia Miani & Giulio Nicoletti & Alessandro Notarpietro & Massimiliano Pisani, 2012. "Banks� balance sheets and the macroeconomy in the Bank of Italy Quarterly Model," Questioni di Economia e Finanza (Occasional Papers) 135, Bank of Italy, Economic Research and International Relations Area.
    9. Henrik Andersen, 2009. "Norwegian banks in a recession: Procyclical implications of Basel II," Working Paper 2009/04, Norges Bank.
    10. Bonfim, Diana, 2009. "Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 281-299, February.
    11. Ines Drumond, 2009. "Bank Capital Requirements, Business Cycle Fluctuations And The Basel Accords: A Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 798-830, December.
    12. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    13. Tor Jacobson & Jesper Lindé & Kasper Roszbach, 2005. "Credit Risk Versus Capital Requirements under Basel II: Are SME Loans and Retail Credit Really Different?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 28(1), pages 43-75, October.
    14. Carling , Kenneth & Lundberg, Sofia, 2002. "Bank Lending, Geographical Distance, and Credit risk: An Empirical Assessment of the Church Tower Principle," Working Paper Series 144, Sveriges Riksbank (Central Bank of Sweden).

    More about this item

    Keywords

    Internal Ratings Based approach; relative risk weights; Value-at-Risk; credit risk models;

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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