Management of Retail Assets in Banking: Comparison of Internal Model Over Basel

Abstract

Retail Assets in Banks has grown due to the trend among banks to grow at a much faster space. Unlike the commercial exposures banks manage retail assets on pooled basis. In this paper, we discuss the methodology of creating pools of revolving retail assets. We compare the capital charges generated by the Basel’s formula with the capital charges generated by two possible earnings at-risk internal capital allocation models. We find that in general, Basel’s capital ratios are closer to those generated by our models for the groups with lower credit risk. We explain the discrepancies to the different ways Basel and our models account for future margin income, to Basel’s’ assumptions about asset correlations

Keywords: CAPITAL, ADVANCED, BASEL, BANKING

JEL Classification: G0, G2