The IRB Approach in the Basel Committee's Proposal for New Capital Adequacy Rules: Some Simulation-Based Illustrations
Sveriges Riksbank Economic Review, Vol. 4, 2002
38 Pages Posted: 10 Aug 2006
Abstract
The Internal Ratings Based (IRB) approach for determining banks' capital adequacy is one of the cornerstones of the Basel Committee's proposed revision of the Basel Accord for banking regulation. This article presents the ideas behind the IRB approach and its fundamental features, and discusses the consequences of a number of its components for the banks' capital adequacy requirements. Using a simulation-based analysis, we will illustrate the relationship between IRB-determined capital and the risks inherent in a loan portfolio in a dynamic perspective assuming different macroeconomic developments.1 We will also examine the effect of the number of risk classes that banks use and of different risk profiles of their credit portfolios.
Keywords: IRB, Basel II, internal ratings, loan portfolio, credit risk, macroeconomic development
JEL Classification: C15, G21, G32, E58
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules
-
The Link between Default and Recovery Rates
By Edward I. Altman, Brooks Brady, ...
-
The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications
By Edward I. Altman, Brooks Brady, ...
-
The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications
By Edward I. Altman, Brooks Brady, ...
-
The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications
By Edward I. Altman, Brooks Brady, ...
-
The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications
By Edward I. Altman, Brooks Brady, ...
-
Understanding Aggregate Default Rates of High Yield Bonds
By Jean Helwege and Paul Kleiman