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Dimensions of Credit Risk and Their Relationship to Economic Capital Requirements

  • Mark Carey
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    Now in prospect is a major revision of international bank capital regulations that would embody recent advances in credit risk measurement and management. Previous regulations have been simpler in structure, with a primary goal of getting capital requirements right on average, and thus have largely ignored the difference between average and marginal. This paper presents evidence that explicit treatment in new regulations of several important dimensions of credit risk is necessary. If such dimensions are compressed or ignored, capital arbitrage activities by banks are likely to continue, leading to an increase in bank failure rates over time.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7629.

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    Date of creation: Mar 2000
    Date of revision:
    Publication status: published as Dimensions of Credit Risk and Their Relationship to Economic Capital Requirements , Mark Carey. in Prudential Supervision: What Works and What Doesn't , Mishkin. 2001
    Handle: RePEc:nbr:nberwo:7629
    Note: CF ME
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    1. Michael B. Gordy, 1998. "A comparative anatomy of credit risk models," Finance and Economics Discussion Series 1998-47, Board of Governors of the Federal Reserve System (U.S.).
    2. Altman, Edward I. & Suggitt, Heather J., 2000. "Default rates in the syndicated bank loan market: A mortality analysis," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 229-253, January.
    3. Chunsheng Zhou, 1997. "Default correlation: an analytical result," Finance and Economics Discussion Series 1997-27, Board of Governors of the Federal Reserve System (U.S.).
    4. Michael B. Gordy, 2000. "Credit VAR and risk-bucket capital rules: a reconciliation," Proceedings 685, Federal Reserve Bank of Chicago.
    5. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
    6. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Ratings versus equity-based credit risk modelling: an empirical analysis," Bank of England working papers 132, Bank of England.
    7. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
    8. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 235-258, September.
    9. Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, 08.
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