An Assessment of the Internal Rating Based Approach in Basel II

Simone Varotto ()

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: The new bank capital regulation commonly known as Basel II includes a internal rating based approach (IRB) to measuring credit risk in bank portfolios. The IRB relies on the assumptions that the portfolio is fully diversified and that systematic risk is driven by one common factor. In this work we empirically investigate the impact of these assumptions by comparing the risk measures produced by the IRB with those of a more general credit risk model that allows for multiple systematic risk factors and portfolio concentration. Our tests conducted on a large sample of eurobonds over a ten year period reveal that deviations between the IRB and the general model can be substantial.

Keywords: Basel II; Internal Rating Based Approach; Credit Rating; Credit Risk (search for similar items in EconPapers)
JEL-codes: G28 G32 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2008-08
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Citations: View citations in EconPapers (2)

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