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Risk Quantification of Retail Credit: Current Practices and Future Challenges

Author

Listed:
  • Anthony M. Santomero

    (Federal Reserve Bank of Philadelphia - Research Department)

  • William Lang

    (Federal Reserve Bank of Philadelphia)

Abstract

This paper analyzes current practices at U.S. banks for quantifying credit in retail portfolios and examines the challenges confronting banks and regulators in developing an internal ratings based (IRB) approach to setting capital requirements for retail exposures. The paper finds that approaches that directly estimate portfolio volatility are potentially a viable approach to estimating economic capital, but currrently these methods do not provide a reliable approach for setting regulatory requirements. Alternative approaches based on direct estimating of structural risk parameters (e.g. probabilty of default) are currently a more viable option for setting capital standards.

Suggested Citation

  • Anthony M. Santomero & William Lang, 2003. "Risk Quantification of Retail Credit: Current Practices and Future Challenges," CEIS Research Paper 13, Tor Vergata University, CEIS.
    • Handle: RePEc:rtv:ceisrp:13
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    File URL: https://ceistorvergata.it/RePEc/rpaper/No-13-Lang,Santomero.pdf
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    References listed on IDEAS

    as
    1. Michael B. Gordy, 2000. "Credit VAR and risk-bucket capital rules: a reconciliation," Proceedings 685, Federal Reserve Bank of Chicago.
    2. Kim, Daesik & Santomero, Anthony M., 1993. "Forecasting required loan loss reserves," Journal of Economics and Business, Elsevier, vol. 45(3-4), pages 315-329.
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