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Credit ratings and the standardised approach to credit risk in Basel II

Patrick Van Roy ()

Finance from University Library of Munich, Germany

Abstract: This paper focuses on the standardised approach to credit risk in Basel II. The minimum capital requirements for the corporate, interbank and sovereign loan portfolios of a representative bank in each EMU country are evaluated by means of Monte-Carlo simulations depending on the credit rating agencies chosen by the bank to risk-weight its exposures. Three main results emerge from the analysis. First, although the use of different combinations of credit rating agencies leads to significant differences in minimum capital requirements, these differences never exceed 10% of banks’ regulatory capital for loans to corporates, banks and sovereigns on average in the EMU. Second, the standardised approach provides a small regulatory capital incentive for banks to use several credit rating agencies to risk-weight their exposures. Third, the minimum capital requirements for the corporate, interbank and sovereign loan portfolios of EMU banks will be higher in Basel II than in Basel I. I also show that the incentive for banks to engage in regulatory arbitrage in the standardised approach to credit risk is limited.

Keywords: New Basel Accord; capital requirements; credit rating agencies (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-reg
Date: 2005-09-11
Note: Type of Document - pdf; pages: 45
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

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