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.
In 2007 the world faced one of the biggest financial crises ever. It was the third important financial crisis in the last 12 years. Spillovers to the real economy and moral hazard behaviour of ...carpetbaggers resulted in enormous pressure on worldwide political institutions to approve a more rigorous regulation on financial institutions and to predict financial crises via early warning systems. We analyzed the performance of structured finance ratings and structured finance issuance/outstanding to detect the main shortcomings of the subprime crisis. Afterwards, we explain the behaviour of market participants with theoretical models and a survey of institutions involved in securitization. With the conclusions of this analysis we evaluate the EU regulation on credit rating agencies and current Basel II enhancements. Finally we can determine that most regulatory enhancements are in accordance with our analyzed shortcomings. Some approaches like the introduction of a leverage ratio are counterproductive and a danger for worldwide economic growth.
Banking and finance are inherently pro-cyclical, a condition exacerbated by a combination of Basel II and mark-to-market accounting. But these latter measures have many advantages, so the need is to ...devise other counter-cyclical macro-prudential policies. This fragility was further enhanced by a decline in bank liquidity (reliance on wholesale funding) and a shift in govenance from partnerships to limited liability public companies. Some commentators have seen the solution to such pro-cyclicality in the guise of direct constraints on bank activity, such as the promotion of 'narrow banking' or limits on bank size. While there are arguments for toughening regulation as systemic risk increases, direct constraints are simplistic; more sensible ideas involve the adoption of better designed macro-prudential regulation, perhaps with some version of banking self-insurance. Quite what the future holds for bank regulation remains, however, to be decided.
In 2007 the world faced one of the biggest financial crises ever. It was the third important financial crisis in the last 12 years. Spillovers to the real economy and moral hazard behaviour of ...carpetbaggers resulted in enormous pressure on worldwide political institutions to approve a more rigorous regulation on financial institutions and predict financial crises via early warning systems. We analyzed the performance of structured finance ratings and structured finance issuance/outstanding to detect the main shortcomings of the subprime crisis. Afterwards we explain the behaviour of market participants with theoretical models and a survey of institutions involved in securitization. With the conclusions of this analysis we evaluate the EU regulation on credit rating agencies and current Basel II enhancements. Finally we can determine that most regulatory enhancements are in accordance with our analyzed shortcomings. Some approaches like the introduction of a leverage ratio are counterproductive and a danger for worldwide economic growth.
Basel II rules allow qualified banks to assess the risk in their portfolio of credit exposures with a methodology based on the informational content of credit ratings and two crucial assumptions: (1) ...the credit risk of individual exposures is driven by one systematic risk factor only and (2) the portfolio is fully diversified. We test the accuracy of the credit risk measures obtained with the new rules by comparing them with benchmark measures derived with a popular ratings-based credit risk model which accounts for multiple risk factors and portfolio concentration. We find that the Basel II assumptions may have a substantial impact on risk assessments and produce deviations from the benchmark that may be economically significant.
Operational risk has become one of the most discussed topics by both academics and practitioners in the financial industry in the recent years. The reasons for this attention can be attributed to ...higher investments in information systems and technology, the increasing wave of mergers and acquisitions, emergence of new financial instruments and the growth of electronic dealing. In addition, the New Basel Capital Accord (known as Basel II) demands a capital requirement for operational risk and further motivates financial institutions to more precisely measure and manage this type of risk. The aim of this paper is to shed light on main characteristics of operational risk management and common applied methods: scenario analysis, key risk indicators, risk control self assessment and loss distribution approach.
In-spite of large volume of Contingent Credit Lines (CCL) in all commercial banks paucity of Exposure at Default (EAD) models, unsuitability of external data and inconsistent internal data with ...partial draw-down, has been a major challenge for risk managers as well as regulators for managing CCL portfolios. Current paper is an attempt to build an easy to implement, pragmatic and parsimonious yet accurate model to determine exposure distribution of a CCL portfolio. Each of the credit line in a portfolio is modeled as a portfolio of large number of option instrument which can be exercised by the borrower determining the level of usage. Using an algorithm similar to basic CreditRisk+ and Fourier Transforms we arrive at a portfolio level probability distribution of usage.
The introduction of the Basel II Capital Accord has encouraged financial institutions to build internal rating systems assessing the credit risk of their various credit portfolios. One of the key ...outputs of an internal rating system is the probability of default (PD), which reflects the likelihood that a counterparty will default on his/her financial obligation. Since the PD modeling problem basically boils down to a discrimination problem (defaulter or not), one may rely on the myriad of classification techniques that have been suggested in the literature. However, since the credit risk models will be subject to supervisory review and evaluation, they must be easy to understand and transparent. Hence, techniques such as neural networks or support vector machines are less suitable due to their black box nature. Building upon previous research, we will use AntMiner+ to build internal rating systems for credit risk. AntMiner+ allows to infer a propositional rule set from a given data set hereby using the principles from Ant Colony Optimization. Experiments will be conducted using various types of credit data sets (retail, small- and medium-sized enterprises (SMEs) and banks). It will be shown that the extracted rule sets are both powerful in terms of discriminatory power, and comprehensibility. Furthermore, a framework will be presented describing how AntMiner+ fits into a global Basel II credit risk management system.
