The Centralized Ratings Based Approach (CRBA): An Alternative to the Basel Standard Approach in Developing Countries

Abstract

This paper proposes a framework to calculate Minimum Capital Requirements (MCR) for credit risk relying only on information available on Credit Registers. The Centralized Ratings Based Approach (CRBA) is devised to be used by small and medium-sized banks in countries that are still following Basel I or the Simplified Standard Approach (SSA) of Basel II. It is based on the frequency of defaults calculated with banks' credit exposures reported monthly to Credit Registers. Data comprises of over 340,000 loans sorted from the Brazilian Credit Register (SCR). First, we use Creditrisk+ to estimate economic capital. Second, we estimate MCR under the SSA, IRB and CRBA. Third, we compare these Approaches on the basis of ex-post portfolio losses under normal and stressed conditions using Monte Carlo simulation. The results show that the CRBA could be a viable alternative to the SSA, minimizing bailout costs, improving banks' survival rate and demanding less MCR.

Keywords: credit risk, Basel, capital requirements, Standard Approach, IRB

JEL Classification: G38