Retail loans and Basel II: Using portfolio segmentation to reduce capital requirements
Abstract
This paper presents an innovative approach for grouping retail loans into homogeneous risk pools, which adheres to the provisions of the revised Basel II framework. The authors interpret Basel II using an efficient classification tree algorithm (recursive partitioning) and test it on a real data set of approximately 413,000 German auto loans. By classifying loans according to selective predictors of default, it is found that banks may achieve significant savings in terms of a lower regulatory capital requirement. Alternatively, this provides the opportunity to increase lending capacity.
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Author's Biography
Daniel Kaltofen is Managing Director for Research of ikf8 institute for banking and finance at Ruhr-University of Bochum, Germany.
Stephan Paul is Professor in Banking and Finance at Ruhr-University of Bochum, Germany.
Stefan Stein is Managing Director of ikf° institute for banking and finance at Ruhr-University of Bochum and Professor of Finance and Asset Management at BiTS (Business and Information Technology School), Iserlohn, Germany.
Citation
Kaltofen, Daniel, Paul, Stephan and Stein, Stefan (2007, December 1). Retail loans and Basel II: Using portfolio segmentation to reduce capital requirements. In the Journal of Risk Management in Financial Institutions, Volume 1, Issue 1. https://doi.org/10.69554/KVAQ3592.
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