Credit risk regulation in the Czech Republic after Basel II

Vodová, Pavla (2007): Credit risk regulation in the Czech Republic after Basel II. Published in:

Abstract

In this year, new capital adequacy regulation, known as Basel II, came into force. Based on these rules, two directives of the European Parliament and of the Council have been revised and the new decree of Czech National Bank has come into force. This new decree brings some new aspects in credit risk regulation. The aim of this paper is to characterize the main changes in credit risk regulation due to Basel II and to outline the effects on the availability of loans for nonfinancial companies. According to the new rules, the bank’s capital charge is calculated to capture credit, market and operational risk. Banks are able to choose between standardized measurement concepts and more refined internal procedures and models which should lead to reduction of capital charges. Two new methods of calculating loan loss provisions have been implemented. Limits for credit exposure of banks remained unchanged. Small and medium-sized companies should benefit both from Standardised Approach and Internal Ratings Based Approach. Corporations with good financial health should benefit from IRB Approach and corporations with rating assessment from external rating agencies will advantage of Standardised Approach. Changes in other aspects of credit risk regulation should not affect the lending activity of banks.

• Item Type: MPRA Paper
• Language: English
• Keywords: credit risk; Basel II; capital requirements, availability of loans; rating
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

BERGER, AN. Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States. Journal of Financial Services Research. 2006, vol. 29, no. 1, pp. 5 – 36.

Capital adequacy regulations for banking institutions, valid from 2007. Praha: Česká spořitelna, 2005. Access from: <http://www.csas.cz/banka/content/inet/internet/en/BaselII_final_cj.pdf>

DECAMPS, JP., ROCHET, JCH., ROGER, B. The Three Pillars of Basel II: Optimizing the Mix. Toulouse: GREMAQ, 2003. Access from: <http://idei.fr/doc/wp/2003/3pillars_basel2.pdf >

Decree of Czech National Bank No. 123 Coll. of 15 May 2007 on prudential rules of banks, credit unions and investment firms. Access from: <http://www.mvcr.cz/sbirka/2007/sb046-07.pdf>

Deutsche Bundesbank Monthly Report. September 2004. Access from: <http://www.bundesbank.de/download/volkswirtschaft/mba/2004/200409mba_en_requirements.pdf>

Directive 2006/48/EC of 14 June 2006, relating to the taking up and pursuit of the business of credit institutions. Access from: <http://eur lex.europa.eu/LexUriServ/site/en/oj/2006/l_177/l_17720060630en00010200.pdf>

Directive 2006/49/EC of 14 June 2006 on the capital adequacy of investment firms and credit institutions. Access from: <http://eur lex.europa.eu/LexUriServ/site/en/oj/2006/l_177/l_17720060630en02010255.pdf>

International Convergence of Capital Measurement and Capital Standards. A Revised Framework. Access from: < http://www.bis.org/publ/bcbs107.pdf?noframes=1>

Principles for the Management of Credit Risk. Consultative paper issued by the Basel Committee on Banking Supervision. July 1999. Access from: <http://www.bis.org/publ/bcbs54.pdf?noframes=1>

Sound Credit Risk Assessment and Validation for Loans. Basel: BIS, 2006. ISBN 92-9197-715-2. Access from: <http://www.bis.org/publ/bcbs126.pdf>

Standard & Poor’s: Sovereign Ratings in Europe. June 2007. Access from: <http://www2.standardandpoors.com/spf/pdf/equity/EuropeanSovereignRatings2007.pdf

VODOVÁ, P. The Development of Credit Risk Regulation in the Czech Republic. In Future of the Banking after the Year 2 000 in the World and in the Czech Republic. VI. Regulation and Supervision of the Capital Market. Proceedings from the International Conference. Karviná: OPF SU, 2003, pp. 68-83. ISBN 80-7248-215-7.