Using Credit Risk Models for Regulatory Capital: Issues and Options
2001; Volume: 7; Issue: 1 Linguagem: Inglês
Autores
Beverly Hirtle, Mark Levonian, Marc R. Saidenberg, Stefan Walter, David Wright,
Tópico(s)Insurance and Financial Risk Management
Resumo* Regulatory capital standards based on internal credit risk models would allow banks and supervisors to take advantage of the benefits of advanced risk-modeling techniques in setting capital standards for credit risk. * The internal-model (IM) capital standards for market risk provide a useful prototype for IM capital standards in the credit risk setting. * Nevertheless, in devising IM capital standards specific to credit risk, banks and supervisors face significant challenges. These challenges involve the further technical development of credit risk models, the collection of better data for model calibration, and the refinement of validation techniques for assessing model accuracy. * Continued discussion among supervisors, financial institutions, research economists, and others will be key in addressing the conceptual and theoretical issues posed by the creation of a workable regulatory capital system based on banks' internal credit risk models. In January 1996, the Basel Committee on Banking Supervision adopted a new set of capital requirements to cover the market risk exposures arising from banks' trading activities. These capital requirements were notable because, for the first time, regulatory minimum capital requirements could be based on the output of banks' internal risk measurement models. The market risk capital requirements thus stood in sharp contrast to previous regulatory capital regimes, which were based on broad, uniform regulatory measures of risk exposure. Both supervisors and the banking industry supported the internal-models-based (IM) market risk capital requirement because firm-specific risk estimates seemed likely to lead to capital charges that would more accurately reflect banks' true risk exposures. That market risk was the first--and so far, only--application of an IM regulatory capital regime is not surprising, given the relatively advanced state of market risk modeling at the time that the regulations were developed. As of the mid-1990s, banks and other financial institutions had devoted considerable resources to developing value-at-risk models to measure the potential losses in their trading portfolios. Modeling efforts for other forms of risk were considerably less advanced. Since that time, however, financial institutions have made strides in developing statistical models for other sources of risk, most notably credit risk. Individual banks have developed proprietary models to capture potential credit-related losses from their loan portfolios, and a variety of models are available from consultants and other vendors. These developments raise the question of whether banks' internal credit risk models could also be used as the basis of regulatory minimum capital requirements. The Basel Committee on Banking Supervision is in the midst of revising regulatory capital standards and has in fact considered using credit risk models for this purpose. However, in a study released in April 1999 (Basel Committee on Banking Supervision 1999a), the Committee concluded that it was premature to consider the use of credit risk models for regulatory capital, primarily because of difficulties in calibrating and validating these models. The purpose of this article is to build on this earlier work, by the Basel Committee and others, and to consider the issues that would have to be addressed in developing a regulatory minimum capital standard based on banks' internal credit risk models. In conducting this exercise, we consider how such a capital regime might be structured if the models were sufficiently advanced. This article is not intended to be a policy proposal, but rather to serve as a discussion laying out the issues that would have to be addressed in creating a capital framework based on credit risk models. In particular, we draw on the structure of the IM capital charge for market risk and examine how this structure might be applied in the credit risk setting. …
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