Retail Loans and Basel II: Using Portfolio Segmentation to Reduce Capital Requirements
Ruhr Universität Bochum - Faculty of Economics; BiTS Business and Information Technology School
Ruhr Universität Bochum - Faculty of Economics
University of Bochum - Department of Finance and Banking
August 20, 2006
ECRI Research Report No. 8
The key concept underlying the Basel II framework for risk measurement and corresponding equity capital standards is that the existing regulations pertaining to credit risk will be individualised through reference to the internal ratings of banks. In accordance with the regulatory guidelines, Daniel Kaltofen, Stephan Paul and Stefan Stein develop an ‘optimised segmentation approach’ with regard to the credit default event and measure the implications for regulatory capital requirements. As regards methodology, they present an innovative technique and test it on a data set of approximately 413,000 motor vehicle loans. By classifying loans according to selective predictors of default, the authors find that banks can achieve significant savings in terms of ensuring a lower regulatory capital requirement. This provides banks with the opportunity to increase lending capacity. The technique overcomes the disadvantages of the more familiar standard methods used in today’s bank risk management and delivers more robust results.
Number of Pages in PDF File: 36
Keywords: Basel II, retail loans, portfolio segmentation, bank risk management, risk measurement, optimised segmentation approach
Date posted: February 8, 2012
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.328 seconds