Credit Portfolio Modelling and its Effect on Capital Requirements

64 Pages Posted: 21 Jun 2016

See all articles by Dilek Bulbul

Dilek Bulbul

Goethe University Frankfurt - House of Finance

Claudia Lambert

European Central Bank (ECB)

Date Written: 2012


The subprime crisis revealed that the adoption of suitable systems for the management of credit risk is of utmost concern. The Basel Committee on Banking Supervision (2009) advises banks to use credit portfolio models with caution when assessing the capital adequacy. This paper investigates whether decisions on total risk-based capital ratios are channeled through credit portfolio models. In other words, do credit portfolio models serve as a relevant determinant for banks to adjust their capital allocation? To empirically test the relationship we measure the average treatment effect by conducting a quasi-natural experiment in which we employ a propensity-matching approach to panel data. We find that the adoption of credit portfolio models positively and significantly affects regulatory capital decisions of banks both directly following the introduction as well as over a longer time horizon. By now it is commonly accepted that overreliance on credit portfolio models composes a fundamental cause of the current financial crisis. Our results put the debate about overreliance on quantitative models in a new perspective. This knowledge may prove valuable for regulators who aim to understand bank behaviour and thus advance regulation.

Keywords: Risk management, regulation, capital requirement, credit portfolio model, propensity score

JEL Classification: G21, G28, G32

Suggested Citation

Bulbul, Dilek and Lambert, Claudia, Credit Portfolio Modelling and its Effect on Capital Requirements (2012). Available at SSRN: or

Dilek Bulbul (Contact Author)

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, DE 60323

Claudia Lambert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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