Retail credit capital charge optimisation and the new Basel Accord

Marius Botha and Gary Van Vuuren

Journal of Risk Management in Financial Institutions, 2009, vol. 2, issue 3, 265-283

Abstract: The Basel Committee for Banking Supervision's new Basel Accord and accompanying credit risk capital equations are designed to encourage the improvement of risk management practices. However, over a range of loan quality for some loan types, improvement of risk management practices by enhanced borrower discrimination leads to increased regulatory capital charges. The effect — entirely due to underlying mathematics — could discourage banks from improving risk management for such loans, thereby contravening the Committee's aims. This paper locates and investigates the source of the problem and illustrates its effect on regulatory capital.

Keywords: Basel II; probability of default; credit risk; capital requirements (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2009:v:2:i:3:p:265-283

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