Credit portfolio modelling and its effect on capital requirements

Dilek Bülbül and Claudia Lambert

No 11/2012, Discussion Papers from Deutsche Bundesbank

Abstract: The subprime crisis revealed that the adoption of suitable systems for the management of credit risk is of utmost concern. The Basel Committee on Banking Supervision (2009) advises banks to use credit portfolio models with caution when assessing the capital adequacy. This paper investigates whether decisions on total risk-based capital ratios are channeled through credit portfolio models. In other words, do credit portfolio models serve as a relevant determinant for banks to adjust their capital allocation? To empirically test the relationship we measure the average treatment effect by conducting a quasi-natural experiment in which we employ a propensity-matching approach to panel data. We find that the adoption of credit portfolio models positively and significantly affects regulatory capital decisions of banks both directly following the introduction as well as over a longer time horizon. By now it is commonly accepted that overreliance on credit portfolio models composes a fundamental cause of the current financial crisis. Our results put the debate about overreliance on quantitative models in a new perspective. This knowledge may prove valuable for regulators who aim to understand bank behaviour and thus advance regulation.

Keywords: Risk management; regulation; capital requirement; credit portfolio model; propensity score (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:112012

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