Dimensions of Credit Risk and Their Relationship to Economic Capital Requirements

40 Pages Posted: 15 May 2000 Last revised: 12 Mar 2010

See all articles by Mark Carey

Mark Carey

Board of Governors of the Federal Reserve - Division of International Finance (IFDP) - International Banking Section

Date Written: March 2000

Abstract

Now in prospect is a major revision of international bank capital regulations that would embody recent advances in credit risk measurement and management. Previous regulations have been simpler in structure, with a primary goal of getting capital requirements right on average, and thus have largely ignored the difference between average and marginal. This paper presents evidence that explicit treatment in new regulations of several important dimensions of credit risk is necessary. If such dimensions are compressed or ignored, capital arbitrage activities by banks are likely to continue, leading to an increase in bank failure rates over time.

Suggested Citation

Carey, Mark, Dimensions of Credit Risk and Their Relationship to Economic Capital Requirements (March 2000). NBER Working Paper No. w7629. Available at SSRN: https://ssrn.com/abstract=221290

Mark Carey (Contact Author)

Board of Governors of the Federal Reserve - Division of International Finance (IFDP) - International Banking Section ( email )

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