Risk Quantification of Retail Credit: Current Practices and Future Challenges

25 Pages Posted: 18 Apr 2003

See all articles by Anthony M. Santomero

Anthony M. Santomero

University of Pennsylvania - The Wharton School

William W. Lang

Promontory Financial Group

Date Written: March 2003

Abstract

This paper analyzes current practices at U.S. banks for quantifying credit in retail portfolios and examines the challenges confronting banks and regulators in developing an internal ratings based (IRB) approach to setting capital requirements for retail exposures. The paper finds that approaches that directly estimate portfolio volatility are potentially a viable approach to estimating economic capital, but currrently these methods do not provide a reliable approach for setting regulatory requirements. Alternative approaches based on direct estimating of structural risk parameters (e.g. probabilty of default) are currently a more viable option for setting capital standards.

Suggested Citation

Santomero, Anthony M. and Lang, William W., Risk Quantification of Retail Credit: Current Practices and Future Challenges (March 2003). CEIS Tor Vergata - Research Paper Series No. 13. Available at SSRN: https://ssrn.com/abstract=392100 or http://dx.doi.org/10.2139/ssrn.392100

Anthony M. Santomero (Contact Author)

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

William W. Lang

Promontory Financial Group ( email )

1201 Pennsylvania Avenue, NW
Suite 617
Washington, DC 20004
United States

HOME PAGE: http://www.promontory.com

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