IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/1244.html
   My bibliography  Save this paper

The Basel II IRB approach revisited: do we use the correct model?

Author

Listed:
  • Varsanyi, Zoltan

Abstract

In this paper I question whether the risk weights in the advanced (IRB) approach of the Basel 2 regulation are appropriate, on a strictly theoretical ground. The major concern is that the model behind the regulation considers defaults only at the end of the time horizon for which capital is to be held - whereas defaults in the whole time interval should be taken into consideration. This latter approach is represented by a model that is different from the Basel model. It follows, as I show, that the Basel model should be viewed just as a technical tool to turn the expected value of the unconditional loss distribution into a given percentile of the same distribution - making use of conditional (on the systemic factor) default probabilities - and should not be interpreted as describing even 'virtual' firms and asset values. More importantly, I also show that a logical step in the theoretical foundation of the model is missing which raises the question whether the risk weights calculated with the model are indeed appropriate. Due to difficulties in the calculation in the alternative approach of the percentiles of the loss distribution no clean-cut answer is given in this paper.

Suggested Citation

  • Varsanyi, Zoltan, 2006. "The Basel II IRB approach revisited: do we use the correct model?," MPRA Paper 1244, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:1244
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/1244/1/MPRA_paper_1244.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Basel II; credit risk;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:1244. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.