Loan portfolio loss distribution: Basel II unifactorial approach vs. Non parametric estimations

Rodríguez Dupuy, Analía (2007): Loan portfolio loss distribution: Basel II unifactorial approach vs. Non parametric estimations.

Abstract

This paper analyzes the measurement of credit risk capital requirements under the new Basel Accord (Basel II): the Internal Rating Based approach (IRB). It focuses in the analytical formula for its calculation, since its derivation to the main assumptions behind it. We also estimate the credit loss distribution for the Uruguayan portfolio in the period 1999-2006, using a non parametric technique, the bootstrap. Its main advantage is that we don’t need to make any assumptions about the form of the distribution. Finally, we compare the requirements obtained using the IRB with the estimated ones, as an approximation of the application of the IRB in the Uruguayan financial system.

• Item Type: MPRA Paper
• Language: English
• Keywords: Basel II - Bootstrap - Credit loss distribution
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Aas, K (2005) – The Basel II IRB approach for credit portfolios: a survey, Norsk Regnesentral (Norwegian Computing Center) www.nr.no/files/samba/bff/SAMBA3305.pdf

Allen, L; Saunders, A (2003) – A survey of cyclical effects in credit risk measurement models, BIS Working Paper 126

Altman, E; Brady, B; Resti, A; Sironi, A (2002) – The link between default and recovery rates: implications for credit risk models and procyclicality, Social Science Research Network (SSRN) Working Paper, www.ssrn.com

Basel Committee on Banking Supervision (1999) – Credit Risk Modelling: current practices and applications - April

Basel Committee on Banking Supervision (2003) - Overview of the new Basel capital accord, Consultative document– April

Basel Committee on Banking Supervision (2004) - Modifications to the capital treatment for expected and unexpected credit losses- January

Basel Committee on Banking Supervision (2005) – An explanatory note on the Basel II IRB Risk Weight Functions –July

Basel Committee on Banking Supervision (versión 2005) – Enmienda al Acuerdo de Capital para incorporar riesgos de mercado - Noviembre

Basel Committee on Banking Supervision (2006) - International Convergence of Capital Measurement and Capital Standards A Revised Framework Comprehensive Version-June

Bernanke, B; Gertler ,M;Gilchrist, S (1996) – The financial accelerator and the flight to quality, NBER Working Paper 4789

Carey, M (1998) - Credit risk in private debt portfolios, Journal of Finance, Vol. 53: pp.1363-87, August

Carey, M (2000) - Dimensions of credit risk and their relationship to economic capital requirements, NBER Working Paper 7629

Carey, M (2002) - A guide to choosing absolute bank capital requirements, Journal of Banking and Finance 26, 929–951

Catarineu-Rabell, E; Jackson, P; Tsomokos, D (2003) – Procyclicality and the new Basel Accord- banks’ choice of loan rating system. www.finance.ox.ac.uk/file_links/finecon_papers/2003fe06.pdf

Céspedes, J; Herrero J; Kreinin, A; Rosen, D (2005) – A simple multi-factor “factor adjustment” for the treatment of diversification in credit capital rules, BIS www.bis.org/bcbs/events/crcp05cespedes.pdf

Chabaane, A; Chouillou, A; Laurent J (2003) – Aggregation and credit risk measurement in retail banking www.gloriamundi.org/picsresources/acacjpl.pdf

Dietshc, M; Petey, J (2003) – Should SME exposures be treated as retail or corporate exposures? A comparative analysis of probabilities of default and assets correlations in French and German SMEs www.philadelphiafed.org/econ/conf/retailcreditrisk/Dietsch--SMEcreditrisk-german&french-240303.pdf

Düllman, K; Scheule, H (2003) – Determinants of asset correlations of German corporations and implications for regulatory capital, www.cofar.uni-mainz.de/dgf2003/paper/paper53.pdf

Efron, B; Tibshirani, R. J. (1993) - An introduction to the bootstrap, Chapman and Hall

Freixas, X; Rochet, J (1997) – Economía Bancaria, Antoni Bosch Editor

Gordy, M.B. (2003) - A risk-factor model foundation for ratings-based bank capital rules, Journal of Financial Intermediation 12, 199 - 232.

Gordy, M.B; Howells, B (2004) – Procyclicality in Basel II: can we treat the disease without killing the patient? , BIS www.bis.org/bcbs/events/rtf04gordy_howells.pdf

Gutierrez Girault, M (2007) – Non parametric estimation of conditional and unconditional loan portfolio loss distributions with public credit registry data, Banco Central de la República Argentina www.bcra.gob.ar

Hall, P (1994) – Methodology and theory for the bootstrap, Handbook of econometrics, volume IV, pp 2342-2381

Hamerle, A; Thilo, L; Rosch,D (2003) – Credit risk factor modeling and the Basel II IRB approach, Deutsche Bundesbank, Discussion paper, Series 2, No 02/2003

Hillebrand, M (2006) – Modeling and estimating dependent loss given default, Center for Mathematical Science, www-m4.ma.tum.de/pers/mhi/hillebrand_lgd.pdf

Hull, J (2006) – Options, futures and other derivatives securities, Prentice Hall, Sixth Edition

Jacobson, T; Lindé, J; Roszbach, K (2002) – The IRB approach in the Basel Committee’s proposal for new capital adequacy rules: some simulation-based illustrations? Social Science Research Network (SSRN) Working Paper, www.ssrn.com

Jacobson, T; Lindé, J; Roszbach, K (2005) - Credit risk versus capital requirements under Basel II: are SME loans and retail credit really different? Social Science Research Network (SSRN) Working Paper, www.ssrn.com

Kashyap, A; Stein, J (2004) – Cyclical implications of the Basel II capital standards http://ideas.repec.org/a/fip/fedhep/y2004iqip18-31nv.28no.1.html

Lowe,P (2002) – Credit risk measurement and procyclicality, BIS Working Paper 116

Majnoni, G; Miller, M; Powell, A (2004) - Bank Capital and Loan Loss Reserves under Basel II: Implications for Emerging Countries, World Bank Policy Research Working Paper 3437

Munniksma, K (2006) – Credit risk measurement under Basel II www.few.vu.nl/stagebureau/werkstuk/werkstukken/werkstuk-munniksma.doc

Ong, M (1999) – Internal Credit Risk Models, Risk Books

Powell, A (2002) – A capital accord for emerging economies?, Banco Mundial, Departamento de Investigaciones www.iadb.org/res/publications/pubfiles/pubS-145.pdf

Standard and Poors (2004) – Measuring and managing credit risk, Mc Graw-Hill

Stephanou, C; Mendoza, J (2005) – Credit risk measurement under Basel II: an overview and implementation issues for developing countries, World Bank Policy Research Working Paper 3556

Segoviano, M; Lowe,P (2002) – Internal ratings, the business cycle and capital requirements: some evidence from an emerging market economy, BIS Working Paper 117

Tasche, D (2005) – Risk contributions in an asymptotic multi-factor framework www.bundesbank.de/download/vfz/konferenzen/20051118_eltville/paper_tasche.pdf

Vasicek, O (2002) – The distribution of loan portfolio value www.moodyskmv.com/conf04/pdf/papers/dist_loan_port_val.pdf

Vasicek, O (2004) – Valor de una cartera de préstamos, Risk España, www.risk.net