Analysis of Granularity Adjustment for Regulatory Capital

Mario Krali () and Andrey Gurov ()
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Mario Krali: Technische Universität München, Munich, Germany
Andrey Gurov: American University in Bulgaria, Blagoevgrad, Bulgaria

Journal of Central Banking Theory and Practice, 2019, vol. 8, issue 3, 111-132

Abstract: The lack of portfolio granularity in terms of exposure has been shown to have important implications for the amount of a financial institution’s economic capital. Based on a numerical simulation model, we provide concrete examples of how granularity affects capital levels. We achieve this by following two simulation approaches, including a dynamic setup as a more realistic version of the analysis. We show that granularity has an indirect effect on the expected loss component. This could lead to significant changes in the competitive environment should banks consider adding a granularity adjustment to the estimated amount of capital and account for it in their pricing.

Keywords: Finance; Regulation; Basel; Granularity; Banks; Capital; Concentration; Risk; Corporate Exposures. (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 G32 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:cbk:journl:v:8:y:2019:i:3:p:111-132

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