Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - A Corporate Analysis

Ricardo Schechtman, Valéria Garcia, Sérgio Koyama and Guilherme Parente

No 91, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The new Basel II Capital Accord has demanded a lot of attention from regulatory and regulated entities due to its innovations in determining capital requirements, particularly in the area of credit risk. This paper simulates the application of Basel II IRB foundation approach for the computation of capital and provision requirements relative to the credit risk of major Brazilian banks' corporate credit portfolios. The IRB necessary parameters of probabilities of default are estimated using variables derived from the raw data present in the Public Credit Register of the Central Bank of Brazil. IRB requirements are compared with the current Brazilian regulatory requirements. By making use of the CreditRisk+ portfolio model this paper shows how it is possible to extend the previous comparison. The main result is that, for the situation analyzed, the IRB approach can be considered more conservative than the current Brazilian prescription.

Date: 2004-12
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