A forward-looking model for time-varying capital requirements and the New Basel Capital Accord
This paper proposes a forward-looking model for time-varying capital requirements which finds application within the New Basel Capital Accord (NBCA) framework. The model aims at reconciling two somewhat contrasting objectives of the NBCA proposal: introducing risk-sensitive capital requirements and avoiding at the same time procyclical effects. The model rests on the relationship existing between default rates and the business cycle phases and proposes a modelisation of the default probabilities which is based on a business cycle forecast over the credit horizon. The model is applied to US data over the forecasting period 1971-2002: despite a failure in predicting the early nineties recession, the objective of raising the capital requirements in anticipation of a recessions is in general satisfied. The results obtained are interesting as they suggest that there is room for dampening procyclicality of capital requirements even within a risk-sensitive framework.
|Date of creation:||Feb 2004|
|Date of revision:|
|Publication status:||Published in Journal of Banking and Finance, Vl. 29, 12, 2005|
|Contact details of provider:|| Web page: http://www.economia.unimore.it/|
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