Credit Risk in European Banks: The Bright Side of the Internal Ratings Based Approach

57 Pages Posted: 20 Mar 2020

See all articles by Doriana Cucinelli

Doriana Cucinelli

Università degli Studi di Milano-Bicocca

Maria Luisa Di Battista

Catholic University of the Sacred Heart of Milan - Catholic University of the Sacred Heart of Piacenza

malvina marchese

Cass Business School, City, University of london

Laura Nieri

University of Genova - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 25, 2018

Abstract

This paper investigates the accuracy of internal rating based (IRB) models in measuring credit risk. We contribute to the growing debate on the current prudential regulatory framework by investigating the use of validated IRB models in promoting efficient risk management practises. Our empirical analysis is based on a novel panel data set of 177 Western European banks observed from 2008 to 2015, in the aftermath of the financial and economic crisis. We find that IRB banks were able to curb the increase in credit risk driven by the macroeconomic slowdown better than banks under the standardized approach. This suggests that the introduction of the internal ratings based approach by Basel II has promoted the adoption of stronger risk management practices among banks, as meant by the regulators.

Keywords: Internal Ratings Based approach; credit risk; prudential regulation; dynamic panels; state dependent endogenous dummy; System GMM

JEL Classification: G21; C23

Suggested Citation

Cucinelli, Doriana and Di Battista, Maria Luisa and marchese, malvina and Nieri, Laura, Credit Risk in European Banks: The Bright Side of the Internal Ratings Based Approach (May 25, 2018). (2018). Journal of Banking & Finance, 93, pp. 213-229. doi:10.1016/j.jbankfin.2018.06.014, Available at SSRN: https://ssrn.com/abstract=3544226

Doriana Cucinelli

Università degli Studi di Milano-Bicocca ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, Milan 20126
Italy

Maria Luisa Di Battista

Catholic University of the Sacred Heart of Milan - Catholic University of the Sacred Heart of Piacenza ( email )

Via Emilia Parmense, 84
Piacenza
Italy

Malvina Marchese (Contact Author)

Cass Business School, City, University of london ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Laura Nieri

University of Genova - Department of Economics ( email )

via Vivaldi, 5
Genova, GE 16126
Italy

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