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Retail credit capital charge optimisation and the new Basel Accord
Journal of Risk Management in Financial Institutions,
2
(3),
265-283
(2009)
Abstract
The Basel Committee for Banking Supervision's new Basel Accord and accompanying credit risk capital equations are designed to encourage the improvement of risk management practices. However, over a range of loan quality for some loan types, improvement of risk management practices by enhanced borrower discrimination leads to increased regulatory capital charges. The effect — entirely due to underlying mathematics — could discourage banks from improving risk management for such loans, thereby contravening the Committee's aims. This paper locates and investigates the source of the problem and illustrates its effect on regulatory capital.
Keywords: Basel II; probability of default; credit risk; capital requirements
The full article is available to subscribers to the journal.
Author's Biography
Marius Botha was employed as a hedge fund risk manager and portfolio analyst at Old Mutual Asset Managers in South Africa before moving to London in 2005 where he worked as a risk manager at Threadneedle Investments for several years. He recently joined Threadneedle’s commodity hedge fund group as a quantitative analyst and portfolio manager. He delivers lectures on risk management in hedge funds at the School of Management, University of the Free State, South Africa, where he is a visiting professor.
Gary Van Vuuren specialised in nuclear physics before moving into risk management at ABSA Bank and Old Mutual Asset Managers in South Africa. He moved to London in 2002 and worked as a risk manager in retail and investment banks before joining the Financial Institutions Group of Fitch Ratings in 2005. He is part of Fitch’s Special Projects Group which specialises in bank risk issues. He is also a visiting professor at the School of Management, University of the Free State, South Africa.
Citation
Botha, Marius and Van Vuuren, Gary (2009, June 1). Retail credit capital charge optimisation and the new Basel Accord. In the Journal of Risk Management in Financial Institutions, Volume 2, Issue 3. https://doi.org/10.69554/ISCA4504.
© Henry Stewart
Publications LLP
Publications LLP