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Retail Loans & Basel II: Using Portfolio Segmentation to Reduce Capital RequirementsDaniel KaltofenRuhr Universität Bochum - Faculty of Economics Stephan PaulRuhr Universität Bochum - Faculty of Economics Stefan SteinUniversity of Bochum - Department of Finance and Banking August 2006 ECRI Research Report No. 8 Abstract: This paper presents a new technique for grouping retail loans into homogenous risk pools, which adheres to the provisions of Basel II. We use recursive partitioning and test it on a data set of approximately 413,000 auto loans. By classifying loans according to selective predictors of default, we find that banks can achieve significant savings in terms of a lower regulatory capital requirement. Alternatively, this provides the opportunity to increase lending capacity.
Number of Pages in PDF File: 36 Keywords: Basel II, retail portfolio, credit risk, classification algorithms, portfolio segmentation JEL Classification: C14, C25, C53, G21, G28 working papers seriesDate posted: February 27, 2007Suggested CitationContact Information
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