Granularity Adjustment for Regulatory Capital Assessment

Michael Gordy and Eva Lütkebohmert

International Journal of Central Banking, 2013, vol. 9, issue 3, 38-77

Abstract: The credit value-at-risk model underpinning the internal ratings-based approach of Basel II and III assumes that idiosyncratic risk has been fully diversified in the portfolio, so that economic capital depends only on systematic risk contributions. We propose a simple granularity adjustment (GA) for approximating the effect of undiversified idiosyncratic risk on required capital. To mitigate operational burden in implementation, we derive upper and lower bounds on the GA under incomplete information on the portfolio. We assess the magnitude and accuracy of the proposed GA on a set of bank portfolios drawn from the German credit register.

JEL-codes: G17 G28 G32 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (15)

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