The IRB Approach in the Basel Committee's Proposal for New Capital Adequacy Rules: Some Simulation-Based Illustrations

Sveriges Riksbank Economic Review, Vol. 4, 2002

38 Pages Posted: 10 Aug 2006

See all articles by Tor Jacobson

Tor Jacobson

Sveriges Riksbank - Research Division

Jesper Lindé

Sveriges Riksbank - Research Division

Kasper Roszbach

Norges Bank - Research Department; University of Groningen - Faculty of Economics and Business

Abstract

The Internal Ratings Based (IRB) approach for determining banks' capital adequacy is one of the cornerstones of the Basel Committee's proposed revision of the Basel Accord for banking regulation. This article presents the ideas behind the IRB approach and its fundamental features, and discusses the consequences of a number of its components for the banks' capital adequacy requirements. Using a simulation-based analysis, we will illustrate the relationship between IRB-determined capital and the risks inherent in a loan portfolio in a dynamic perspective assuming different macroeconomic developments.1 We will also examine the effect of the number of risk classes that banks use and of different risk profiles of their credit portfolios.

Keywords: IRB, Basel II, internal ratings, loan portfolio, credit risk, macroeconomic development

JEL Classification: C15, G21, G32, E58

Suggested Citation

Jacobson, Tor and Linde, Jesper and Roszbach, Kasper F., The IRB Approach in the Basel Committee's Proposal for New Capital Adequacy Rules: Some Simulation-Based Illustrations. Sveriges Riksbank Economic Review, Vol. 4, 2002, Available at SSRN: https://ssrn.com/abstract=923542

Tor Jacobson

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
+46 8 787 0000 (Phone)

HOME PAGE: www.riksbank.com

Jesper Linde

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
+46 8 787 0873 (Phone)

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

Kasper F. Roszbach (Contact Author)

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Groningen - Faculty of Economics and Business ( email )

Department of Economics, Econometrics and Finance
Nettelbosje 2
Groningen, NL 9747 AE
Netherlands

HOME PAGE: http://www.rug.nl/staff/k.f.roszbach/

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