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Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macroeconomy

Tor Jacobson

Sveriges Riksbank - Research Division

Kenneth Carling

Uppsala University

Jesper Lindé

Sveriges Riksbank - Research Division

Kasper Roszbach

Sveriges Riksbank (Bank of Sweden); University of Groningen,

September 2002

Sveriges Riksbank Working Paper No. 142

The Internal Ratings Based (IRB) approach for capital determination is one of the cornerstones in the proposed revision of the Basel Committee rules for bank regulation. We evaluate the IRB approach using historical business loan portfolio data from a major Swedish bank for the period 1994 to 2000. First, we estimate a duration model that takes into account both company, loan related and macroeconomic variables. Next, we obtain a Value-at-Risk-type (VaR) credit risk measure, by model-based simulations. Moreover, we study how both the bank's credit risk and buffer capital changes over time (had the bank been subject to the proposed rules). This approach allows us to (i) make individual forecasts of default risk conditional on company, loan and macro variables, (ii) study portfolio credit risk over time, (iii) assess to what extent the new Accord will achieve its main objective of increasing credit risk sensitivity in minimal capital charges, and (iv) compare current capital requirements to those under the proposed system. Our results show that macro conditions have great explanatory power in predicting default risk and calculating credit risk. The IRB approach, although sensitive to the choice of some horizon parameters, is an achievement in the intended direction.

Number of Pages in PDF File: 54

Keywords: Internal Ratings Based approach, relative risk weights, Value-at-Risk, credit risk models

JEL Classification: C41, G21, G33, G38

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Date posted: January 22, 2004  

Suggested Citation

Jacobson, Tor and Carling, Kenneth and Lindé, Jesper and Roszbach, Kasper, Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macroeconomy (September 2002). Sveriges Riksbank Working Paper No. 142. Available at SSRN: http://ssrn.com/abstract=488542 or http://dx.doi.org/10.2139/ssrn.488542

Contact Information

Tor Jacobson
Sveriges Riksbank - Research Division ( email )
S-103 37 Stockholm
+46 8 787 0000 (Phone)
HOME PAGE: www.riksbank.com
Kenneth Carling
Uppsala University ( email )
Office of Labour Market Policy Evaluation
SE-751 20 Uppsala
+46-18-4717087 (Phone)
Jesper Linde
Sveriges Riksbank - Research Division ( email )
S-103 37 Stockholm
+46 8 787 0873 (Phone)
HOME PAGE: http://www.riksbank.com
Kasper F. Roszbach (Contact Author)
Sveriges Riksbank (Bank of Sweden) ( email )
Monetary policy department
Stockholm, SE 103 37
+46 8 787 0823 (Phone)
HOME PAGE: http://www.riksbank.se/research/roszbach

University of Groningen, ( email )
Department of Economics, Econometrics and Finance
Nettelbosje 2
Groningen, NL 9747 AE
HOME PAGE: http://www.rug.nl/staff/k.f.roszbach/
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References:  40
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