A Guide to Choosing Absolute Bank Capital Requirements
33 Pages Posted: 27 Jun 2002
Date Written: May 2002
Resampling implementation of a stress-scenario approach to estimating portfolio default loss distributions is proposed as the basis for estimates of the appropriate absolute level of economic capital allocations for portfolio credit risk. Estimates are presented for stress scenarios of varying severity. Implications of use of different analysis time horizons are analyzed. Results for a numeraire portfolio are quite sensitive to such variations. Although the analysis is framed in terms of recent proposals to revise regulatory capital requirements for banks, the arguments and results are also relevant for bankers making capital structure decisions.
Keywords: risk management, credit risk, capital requirements, bank regulation
JEL Classification: G11, G28, G10, G20
Suggested Citation: Suggested Citation